 In this presentation, we will take a look at some of the components of a manufacturer's income statement. Comparing and contrasting where a manufacturer's income statement may differ from a service company or a merchandiser. Support a counting instruction by clicking the link below giving you a free month membership to all of the content on our website broken out by category further broken out by course. Each course then organized in a logical reasonable fashion making it much more easy to find what you need than can be done on a YouTube page. We also include added resources such as Excel practice problems, PDF files and more like QuickBooks backup files when applicable. So once again click the link below for a free month membership to our website and all the content on it where a manufacturer a company that makes the inventory could differ from a service company that has no inventory or a merchandiser who just purchases and sells inventory rather than making the inventory. Part of that will be the calculation of the cost of goods sold. So clearly one of the differences we're going to have from a manufacturer to a service company will be related to inventory and the major difference between the inventory accounts on the income statement is the cost of the inventory the expense related to the inventory at the point of sale that being the cost of goods sold. Therefore a service company is often going to have just a single step income statement where we group up revenue and then we group up all of expenses and we subtract out to get the net income for a merchandiser that has inventory and a manufacturer that makes inventory. We're also going to have the cost of goods sold the cost of goods sold calculation will be very similar but it will have some differences that we want to note from a merchandiser company to a manufacturing company. Very important formula we want to just memorize this formula we'll be using this formula many different ways. So the merchandiser company if we thought about the merchandiser company first and then convert and say okay what do we need to change to go to a manufacturing company to calculate cost of goods sold for a merchandiser a company that just purchases and sells inventory doesn't make the inventory the cost of goods sold calculation would be the beginning inventory what was inventory at the start of the period the start of the month or the year and then we're going to add to it purchases we know what the purchases are because we actually paid for the inventory that we bought and therefore there's no real estimation in terms of the purchases that's going to give us the cost of goods available for sale that's what we could have sold during the time period if it's a month we could have sold this many units how many did we sell to do that and this is kind of a periodic calculation and again we can we're going to use the cost of goods calculation whether we use a periodic system or perpetual system oftentimes but note when the format of it is kind of more of a periodic type of format because we're saying this is the cost of goods available for sale and then we're going to subtract out ending inventory which we can imagine we got through a physical count we count the inventory at the end as we would in a periodic inventory system and therefore if this is the inventory we had available for sale the inventory we could have sold and this is the inventory that we have not yet sold the difference between those two is what we have sold on a cost basis and that's going to be the cost of good sold that's going to be the expense that's what will be reported on the income statement as an expense the most important expense for a merchandiser or a manufacturer the cost of the inventory that we are selling now if we look at a manufacturer we can say okay how can we convert this in order to deal with a manufacturer rather than a merchandiser we're going to have that same beginning inventory and then rather than having purchases however we're going to add to it cost of goods manufactured so we didn't purchase these goods obviously we did purchase the materials but we're going to have cost of goods manufactured which is going to include what we made in terms of not just materials but what we made in terms of the work that we put in the direct labor and the overhead that's going to be put in there now this number you might be saying well where where are we going to get that number we're going to have to figure that out through our production process and once we do that however this is the number that we're going to use other and it's not going to be purchases so that's where the big difference is you can see that they're basically you know similar in that purchases is obviously the activity that we had happen through a merchandiser company and they manufacturer what had happened is that we not only purchased materials but we made them into inventory so that's the cost of goods manufactured that then will give us the cost of goods available for sale and then we're going to do the same subtracting out the ending finished goods inventory so what has been completed in the finished goods and that will give us our cost of goods sold so you can see the two formulas are going to be very similar now notes that you can use this formula not just for the calculation of cost of goods sold I mean if there's a book question especially multiple choice questions will often maneuver things around so that we will have to solve for different types of items here so and that's one way that a multiple choice question can be used in order to to to test conceptual components and so note that any of these are any of these components of the formula a multiple choice question could ask for meaning the multiple choice question could give us beginning inventory and not asking for beginning inventory and give us the rest of the data what we do not want to do is try to memorize a formula to get to beginning inventory because all we're doing is is adjusting the algebra what we want to do is write down this formula and say that okay we have cost of goods sold and we can back into the beginning inventory the same would be true for if they gave us all this information but not the cost of goods manufactured we're not going to rewrite another formula to figure out what the cost of goods manufactured is we're going to use this formula and just use algebra to say okay this is the unknown now I know everything else this is the unknown so any any question that's going to be related to any of these items could be ending inventory of course as well you want to just be able to write down this formula and then apply out whatever you need and also note of course that this is a sub-total this is a subcategory so sometimes you can actually if you want to simplify your algebra then you can eliminate this item say beginning inventory plus cost of goods sold minus ending inventory gives us cost of goods available for sale and then if you if you do that then they can ask for if they give you the other components they can eliminate any one of these and ask you for that and what you want to do is just write down this formula okay and say this is the unknown I don't know that one so now I'm going to do what I got to do to make that number right if I know this number if I know this number then I can do what I got to do to make that number what it needs to be if we're looking at an example here we're going to say if if beginning inventory happened to be 14,000 we're going to add to it cost of goods manufactured what we made we're going to say 200,000 here that gives us what's available 214,000 now of course note that we're talking about dollars when we this is the cost of what we made here so we're not talking about units we're going to have to convert that into dollars and that's a bit you know something that more confusing than we might first think to do that but then we have the cost of available for sale cost goods available for sale and then we're going to subtract out what's still in Indian inventory which we can get from typically a physical count now again this physical count is in dollars so we have 12,000 dollars worth the physical count would be in units which we would have to then convert it some way to dollars if this is the number of dollars worth of inventory we had available for sale in the month and this is how much it has not yet been sold the difference between the two then is going to be what had been sold which we're going to say is cost of goods sold this then is what will be reported on the income statement reducing gross reducing sales by the cost of goods sold to get to gross profit and ultimately to the net income this is going to be our most important expense on the income statement if we are a manufacturer because it's going to be the highest cost typically the things that we make if we make stuff is going to be the highest cost of of what we do and therefore we're going to break it out separately most of the time and have the sales minus the cost of goods sold giving us that sub category of gross profit on the income statement