+ Purchases of inventory- Ending inventoryACCT 2521, Fall 2021, Dr. ReischAdditional notes for Ch. 1 (covered 8.30.21)INCOME STATEMENTSRecall from financial accounting, and earlier Ch. 1 notes, that the traditional (or multi-step) income statement looks like (the abbreviated version is on the right): Sales Sales- Cost of Goods Sold - CGS Gross Profit GP- Operating. Expenses -Op Inc (or SGA exp) Net Income NIThe traditional income statement is required by GAAP (generally accepted accounting principles) for external reporting. The income statement can also be broken down differently for managerial (internal) purposes, and it does not follow GAAP. Think of what goes into CGS --the product costs of the finished goods that were sold; it contains both fixed costs (e.g., rent that is included with MOH) and variable costs (e.g., DM, DL, IM, IL utilities, etc.). All we are doingnow is breaking out the expenses on the income statement (both CGS and operating expense) into FC and VC. We still have revenues (sales) less expenses to get net income. This new income statement uses what we call the contribution approach. It looks like this (the abbreviated version is on the right): Sales Sales- Variable Costs - VC Contribution Margin CM - Fixed Costs -FC Net Income NIIncluded in VC are all variable costs that show up on the income statement (both product and operating expenses), and the FC includes all fixed costs that show up on the income statement (both product and operating).So, Sales Fixed (e.g., rent –part of MOH) Sales- CGS Variable (e.g., DM or DL) - VC GP CM- Op Exp Fixed (e.g., CEO’s salary) - FC NI Variable (e.g., sales commissions) NI1So, all we are doing is re-grouping all VC (both variable product and variable period) to the top of the income statement, and all FC to the bottom of the income statement (includes both fixed product and fixed period costs). What we’ll see later is that we modify the income statement based on cost behavior (VC or FC) so that we can predict what future costs will be.We compare the different income statements while completing E-11 and E-15 in classINVENTORY FLOWTo complete exercise 15 (and homework problem 19), you also need to know the flow of inventory (and we’ll discuss this much more in Ch. 3). The basic inventory flow is as follows: what inventory you have in the beginning + what you add to it = all the inventory that is available for your use- what is inventory is left= the inventory that as soldAlternatively (just rearranging the bottom):what inventory you have in the beginning + what you add to it = all the inventory that is available for your use- the inventory that as sold = what is inventory is leftFor this class, and for consistency in the future, this is the “formula” we will use when referring the inventory cost flow:Beginning inventory+ Purchases of inventoryGoods available for sale- Ending inventoryCost of Goods SoldSee in-class E-15 for an example of how it is