FUNDAMENTALS OF ACCOUNTANCY,

BUSINESS AND MANAGEMENT 1

MODULE
Module No. 6: Week 6: Second Quarter
STATEMENT OF COST OF GOODS SOLD AND GROSS PROFIT

Learning Competencies
Prepares the Statement of Cost of Goods Sold and Gross Profit
Code: ABM_FABM11-IVe-j -41

Objective
After reading this module, the learners will be able to:
1. define statement of goods sold and gross profit
2. identify the inventory costing method
3. prepare statement of cost of goods sold and gross profit

Let’s Recall
Classification: Write “Dr” if the account is to be debited in a closing entry, “Cr” if the
account is to be credited in a closing entry, or “N/A” if the account is nether debited nor
credited in a closing entry.
1. Merchandise Inventory (beginning)
2. Purchase Returns and Allowances
3. Sales
4. Accounts receivable
5. Accumulated Depreciation-Store Furniture and Fixtures

Let’s Understand

A “Statement of Cost of Goods Sold (COGS) and Gross Profit” is not a formal accounting report that is
prepared for external reporting purposes.
The “Statement of Cost of Goods Sold and Gross Profit” is similar to the “Income Statement.” It is a part
of an income statement. However, the “Statement of Cost of Goods Sold and Gross Profit” ends with the
gross profit, meaning it does not show information about the other expenses.

Cost of goods sold (COGS) / Cost of sales refers to the direct costs of producing the goods sold by a
company. This amount includes the cost of the materials and labor directly used to create the good. It
excludes indirect expenses, such as distribution costs and sales force costs.

KEY TAKEAWAYS
➢ Cost of goods sold (COGS) includes all of the costs and expenses directly related to the production
of goods.

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 ➢ COGS exclude indirect costs such as overhead and sales & marketing.
➢ COGS is deducted from revenues (sales) in order to calculate gross profit and gross margin.
➢ Higher COGS result in lower margins.
➢ The value of COGS will change depending on the accounting standards used in the calculation.

As a rule of thumb, if you want to know if an expense falls under COGS, ask: "Would
this expense have been an expense even if no sales were generated?"

Inventory costing Method

The value of the cost of goods sold depends on the inventory costing method adopted by a company. There
are three methods that a company can use when recording the level of inventory sold during a period: First
In, First Out (FIFO), Last In, First Out (LIFO), and the Average Cost Method.

FIFO
The earliest goods to be purchased or manufactured are sold first. Since prices tend to go up over time, a
company that uses the FIFO method will sell its least expensive products first, which translates to a lower
COGS than the COGS recorded under LIFO. Hence, the net income using the FIFO method increases over
time.

LIFO
The latest goods added to the inventory are sold first. During periods of rising prices, goods with higher
costs are sold first, leading to a higher COGS amount. Over time, the net income tends to decrease.

Average Cost Method

The average price of all the goods in stock, regardless of purchase date, is used to value the goods sold.
Taking the average product cost over a time period has a smoothing effect that prevents COGS from being
highly impacted by extreme costs of one or more acquisitions or purchases.

Let’s recall the formula of COGS presented in FABM1 Q2 Module 3:

Beginning inventory P xx
Add: Net purchases xx
Total Goods Available for Sale (xx)
Less: Ending inventory (physical count) (xx)
Cost of Goods sold P xx

*For PERPETUAL INVENTORY SYSTEM, it is not necessary to use this formula to identify the COGS since it is already
recorded in every transaction.

Let us have an example of a business that use Periodic inventory

system.

Bing has a beverage store. Bing has a beginning inventory of 50 bottles

of a beverage with a unit cost of P20 each for the month of December 2019.
During the period, she called her supplier to deliver ten cases of the
beverage. Each case contains 24 bottles with a unit cost of P20 each. At
closing time, she has two cases and 4 bottles of beverage left. The selling
price for each bottle of a beverage is P70.
Using the formula above, let us compute for the COGS:

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 In units Unit Total
(bottles) cost
Beginning inventory 50 P20- P1,000-
Add: Net purchases 240* P20- 4,800-
Total Goods Available for Sale 290 P5,800-
Less: Ending inventory (physical count) (52) ** P20 (1,040-)
Cost of Goods sold 238 P4,760-

*Net purchases: 10 cases x 24 bottles=240

**Ending inventory= the number of unsold beverages ((2 cases x 24 bottles) + 4 bottles)) =52

After computing the amounts above, Bing should check her sales register to see if she had a recorded sale of
238 bottles or P16,660 (238 bottles x P70 selling price per bottle). If this is so, the good for Bing! If not,
she needs to reconcile the difference.
Let us look at the possible scenarios:
For you to easily understand on when to determine shortages and overages, let us use the phrases “should
be” vs. “entry made” analysis commonly used by accountants.
Should be is lit “ito dapat” in Filipino, while Entry made is “ito ang ginawa” in Filipino. Let us try this:
Scenario #1: What if the recorded sale is only 236 bottles, instead of 238? In this scenario, Bing has a
shortage, meaning there are 2 bottles missing! (Shortage means “kulang” in Filipino.) Analyze the
computations below:
COGS per records (entry made) 236
COGS based on physical count (should be) (238)
Shortage (missing sales) (2)
Obviously, Bing needs to investigate the cause of the discrepancy. Here are some possible reasons for the
discrepancy:
➢ Maybe there were breakages.
➢ Maybe the bottles delivered by the supplier were incomplete.
➢ Maybe, Bing failed to record a sale.
Depending on the result of the investigation, the cost of missing beverages may be recorded as loss (if it is
nobody’s fault) or as a receivable (if a customer forgot to pay for the beverages).
Scenario #2: What if the recorded sale is 241 bottles, instead of 238? In this scenario you have an overage
of 3 bottles. (Overage means “sobra” in Filipino.) Analyze the computation below:

COGS per records (entry made) 241

COGS based on physical count (should be) (238)
Overage 3

Gross Profit
Gross profit (gross income, gross margin, or sales profit) is simply “Net sales minus Cost of Goods Sold.”

Net sales Pxx

Less: COGS (xx)
Gross profit Pxx

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Gross profit represents the profit a business earns after deducting the cost of the goods sold or services
rendered, but before deducting other expenses.
Profit (or Net profit) is different form gross profit. Profit is the amount derive after deducting all other
expenses from the gross profit.
Let us use Bing’s Beverage store transactions above.
Bing sold a total of 238 bottles at P70 each for the day. Therefore, her Net sales, is P16,660 (238 bottles x
P70 selling price per bottle).
Net sales* P16,660-
Gross Profit= Net sales - COGS
Cost of Goods Sold (4,760-)
Gross Profit P11,900-
Rent Expense (xx)
Depreciation expense (xx)
Salaries expense, etc. (xx) Profit= Net sales – All expenses
Profit (Net profit) Pxx

*Net sales can simply be total number of units sold x selling price per unit. Or:
*Net sales is Total sales minus sales returns and discounts (we will only use this, if there is a transaction of
sales returns and discounts).

Sales Pxx
Less: Sales returns (xx)
Less: Sales discounts (xx)
Net sales Pxx

✓ Gross profit = Net sales- Cost of goods sold

✓ Net sales= Total sales-sales returns and discounts
✓ Net sales= Total number of units sold x selling price per unit
✓ COGS = Beginning inventory + Net Purchases-Ending inventory
✓ Net purchases= additional purchases within the period.

Statement of Cost of goods sold and Gross Profit

Below is an example of Statement of Cost of Goods sold and Gross Profit of Bing’s Beverage Store for the
month ended December 31, 2019.

BING’S BEVERAGE STORE

Statement of Cost of goods sold and Gross profit
For the period ended December 31, 2019
Sales P 16,660-
Cost of goods sold:
Beginning inventory P1,000-

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 Add: Net purchases 4,800-
Total goods available for sale 5,800-
Less: Ending inventory (1,040-) (4,760-)
Gross profit P11,900-

GENERAL INSTRUCTION:
1.Read and follow instructions carefully.
2. COPY and ANSWER on a separate sheet of paper.
3. Answer this activity with all HONESTY and INTEGRITY.
Let’s Apply
Activity 1: TRUE or FALSE: Write True if the statement is correct and False if the statement
is incorrect.
1. Inventories are assets that are held for sale in the ordinary course of business activities.
2. The two inventory systems are: Perpetual system and Periodical system. False
3. Gross profit= Net sales minus Cost of goods sold

Activity 2: Solve the following.

1. Beginning Inventory is P40,000; Net purchases, P180,000; Cost of goods sold, P200,000. How much is
the ending inventory?
2. Beginning Inventory is P60,000; Net purchases, P270,000; Ending inventory is P90,000. How much is
the cost of goods sold?
3. Beginning Inventory is P40,000; Cost of goods sold, P200,000; Ending Inventory is P20,000. How much
is the net purchases?
4. Net purchases, P270,000; Cost of goods sold, P240,000; Ending Inventory is P90,000. How much is the
beginning inventory?
5. Net purchases, P270,000; Cost of goods sold, P240,000; Ending Inventory, P90,000. How much is the
total goods available for sale?

Let’s Analyze
MM Medical Supplies is a retail store of medical supplies owned by Maricar Monel. For
month of December 2018, her beginning inventory of alcohol is 100 pcs., cost P20 each
and selling price at P35 per piece. During the period, she purchased additional 500 pieces
of alcohol from her new supplier Marco O Manufacturing at P15 each, which she intends
to sell at P35/piece.
Using the information above, answer the independent questions below.
1. If she sold 50 pcs of alcohol during the period using FIFO method. How much is the Cost of goods
sold?
2. If she sold 50 pcs of alcohol during the period using LIFO method. How much is the Cost of goods
sold?
3. If she sold 50 pcs of alcohol during the period using AVERAGE COST method. How much is the Cost
of goods sold?
4. If her Ending Inventory is 25 pieces; how much is the COGS if she used FIFO method?
5. If her Ending Inventory is 25 pieces; how much is the COGS if she used LIFO method?

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6. If her Ending Inventory is 25 pieces; how much is the COGS if she used AVERAGE COST method?
7. If her Ending Inventory is 25 pieces; how much is the Gross Profit if she used AVERAGE COST
method?
8. If her Ending Inventory is 25 pieces; how much is the Gross Profit if she used FIFO method?
9. If her Ending Inventory is 25 pieces; how much is the Gross Profit if she used LIFO method?
10. In which method will she be able to have a higher Gross Profit?

Let’s Try
GENERAL INSTRUCTION:
1.Read and follow instructions carefully.
2. Answer this activity with all HONESTY and INTEGRITY.
Read and answer each statement/problem carefully.

Prepare a statement of Cost of goods sold and Gross Profit for MM Medical Supplies
MM Medical Supplies is a retail store of medical supplies owned by Maricar Monel. For month of
December 2018, her beginning inventory of alcohol is 100 pcs., cost P20 each and selling price at P35 per
piece. During the period, she purchased additional 500 pieces of alcohol from her new supplier, Marco O
Manufacturing at P15 each, which she intends to sell at P35/piece.
Below are the details of her transactions for the month:
1. She used FIFO method
2. Sold 125 pieces of alcohol for the month of December 2018.

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