Revenues

Revenues are dollar amounts received by a firm. Northeast obtains its revenues solely from the sale of its products. The revenues section of its profit and loss account begins with gross sales. Gross sales are the total dollar amount of all goods and services sold during the accounting period. From this are deducted the dollar amounts of

► Sales returns or merchandise returned to the firm by its customers

► Sales allowances or price reductions offered to customers who accept slightly damaged or soiled merchandise

► Sales discounts, or price reductions offered by manufacturers and suppliers to customers who pay their bills promptly.

The remainder is the firm's net sales. Net sales are – the actual dollar amount received by the firm for the goods and services it has sold, after adjustment for returns, allowances, and discounts. For Northeast Art, net sales are $451,000.

Cost of Goods Sold

According to Figure 3.2, Northeast began its accounting period with a merchandise inventory that cost $40,000 (see beginning inventory under Cost of goods sold). During the period, the firm purchased for resale merchandise worth $346,000. But, after taking advantage of purchase discounts, it paid only $335,000 for this merchandise. Thus, during the year Northeast had goods available for sale valued at $40,000 + $335,000 = $375,000.

At the end of the accounting period, Northeast had an ending inventory of $41,000. Thus it had sold all but S41,000 worth of the available goods. The cost of goods sold by Northeast was therefore $375,000 less $41,000, or $334,000.

This is the standard method of determining the cost of the goods sold by a retailing or wholesaling firm during an accounting period. It may be summarized as follows:

beginning net ending

Cost of goods sold = inventory + purchases - inventory

A manufacturer must include its raw-materials inventories, work-in-process inventories, and direct manufacturing costs in this computation.

A firm's gross profit on sales is its net sales less the cost of goods sold. For Northeast, this was $117,000.