Income Statements and Inventory Accounting Systems

This set of flashcards covers the formulas for single-step and multi-step income statements, report heading requirements, and the characteristics of perpetual versus periodic inventory systems.

Single-Step Income Statement Formula

$$(Revenue + Gains) - (Expenses + Losses) = Net Income$$

Multi-Step Income Statement Step 1

$$\text{Gross Profit} = \text{Net Sales} - \text{Cost of Goods Sold}$$

Multi-Step Income Statement Step 2

$$\text{Operating Income} = \text{Gross Profit} - \text{Operating Expense}$$

Multi-Step Income Statement Step 3

$$\text{Net income} = \text{Gross Income} + \text{Nonoperating Income}$$

"Who" Heading

The name of the company or proprietor's name if there is no trade name.

"What" Heading

The name or title of the report.

"When" Heading

The period covered by the report, such as the month ended, quarter ended, or year ended depending upon the cut-off date.

Perpetual Inventory System

A system that keeps continual track of inventory balances and provides automatic updates when receiving or selling inventory.

Perpetual Inventory Recording

Purchases and returns are immediately recorded in the inventory accounts.

Grocery store

An example of a business that uses a Perpetual Inventory System.

Periodic Inventory System

An inventory system that uses an occasional physical count to measure the level of inventory and the cost of goods sold ($COGS$).