What do they cost of goods sold and gross profit mean?
The cost of goods sold refers to the total direct cost incurred in the production of products and services sold. It involves the cost of material and direct labor applied to the creation of goods and services. However, it excludes indirect expenses like the sales force and the distribution costs.
Gross profits mean the profit obtained after deducting the cost of goods sold from the total revenue or sales. It profit measure the companies of using its resources in the production of goods and services.
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How much gross profit do I make on each hat?
SOLUTION
Gross profit= total sales-cost of goods sold
Sales = number of hats * selling price
=78* $12.00
=$ 936.00
Cost of goods sold= 78*5
= $390.00
Therefore, GROSS PROFIT =$936.00-$390.00
=$546.00
Why show both gross profit and net income?
Both gross profit and net profit are shown because gross profit equates to gross margin, which is a vital instrument in the analysis of the financial statement. Gross profit is the intermediate earnings before including all other expenses, and net profit is the final profit or loss after deducting all additional costs and equates to net profit margin ( Kahn & Baum, 2020). It is also an essential measure in the analysis of the financial statement. Therefore, both the profits should be shown in income statements since they express different standards.
If I have hats returned or give a discount, how will that be shown on the income statement?
Returned hats are goods returned by the customers after selling. It does not necessarily result in a reduction in the cost of goods sold since the goods might not have been sold to the third party during the accounting period ( Kahn & Baum, 2020) . Returns inwards are deducted from the revenue and debited in the company books. Discounts are deductions from the original cost of goods and services (Kahn & Baum, 2020) . Discounts, sales return, and other allowances are treated as a direct deduction from sales in the income statement.
References
Kahn, M. J., & Baum, N. (2020). Basic Accounting and Interpretation of Financial Statements. The Business Basics of Building and Managing a Healthcare Practice (pp. 13-18). Springer, Cham.
