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The trading statement is an expanded version of sales portion of the Income
statement. The trading statement's main objective is to determine sales, cost of
sales and gross profit. The trading statement forms part of effective
bookkeeping within the accounting discipline.
Primary formula
Sales - Cost of Sales = Gross Profit
Cost of sales
The main parts of a cost of sales calculation consists of:
Opening inventories (The amount of inventories that the entity has on hand
from the previous year)
+ Purchases (The amount of inventories that the entity purchases over the
course of the year)
= Goods available for sale (Opening inventories + Purchases +/- other items)
- Closing inventories (Inventory on hand at the end of the year)
Example
Question:
A business entity purchases £10400 worth of equipment in order to construct
computers. During the financial year, £1400 worth of equipment is returned to
the entity by its customers as the equipment was determined to be faulty. The
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previous financial year, the entity had £3000 worth of equipment left over. The
entity makes use of a trucking company to deliver all of its goods. The trucking
company charges the entity £120 for the year to deliver the equipment. The
entity sold £14500 worth of items during the year to various customers. The
entity checked its inventory stock levels at the end of the year and determined
that there was £2000 worth of inventories left over.
Solution:
Sales calculation:
Sales = Sales for the year - Returns in (Goods that were returned to the entity
during the course of the year)
Sales = £14500 - £1400
Sales = £13100
Cost of sales calculation:
Therefore Cost of sales = Goods available for sale - Closing inventory