Calculation of the Cost of Goods Sold category in the Statement of Income
(or Profit-and-Loss Statement as it is sometimes called) varies depending
on whether the business is retail, wholesale, or manufacturing. In
retailing and wholesaling, computing the cost of goods sold during the
accounting period involves beginning and ending inventories. This, of
course, includes purchases made during the accounting period. In
manufacturing it involves not only finished-goods inventories, but also raw
materials inventories goods-in-process inventories, direct labor, and
direct factory overhead costs.
Regardless of the calculation for Cost of Goods Sold, deduct the Cost of
Goods Sold from Net Sales to get Gross Margin or Gross Profit. From Gross
Profit, deduct general or indirect overhead such as selling expenses,
office expenses, and interest expenses, to calculate your Net Profit. This
is the final profit after all costs and expenses for the accounting period
have been deducted.
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