Accounting theory and practice, Volume 2 (of 3)

by Roy B. Kester

Form for Manufacturers and Merchants

The form suggested by the Federal Reserve Board as suitable for manufacturers and merchants is presented below. It is shown as a comparative statement of several years, but the same content and order of arrangement of items would, of course, be followed for any individual year. When presenting a single year’s activities, the money columns should be so used as better to present significant figures and their interrelations. The use of one column for items and another for totals accomplishes this. The form shown presents, after the figure of Net Income—Profit and Loss, a statement of extraordinary charges and credits to profit and loss tied up with the former balance of surplus, an appropriation made of profit and surplus at the end of this period, giving as a final figure the new surplus at its close—which is the figure carried on the balance sheet. This last portion of the statement is often shown as a separate statement of surplus. The items which are best handled as charges direct to surplus so as not to affect the profit and loss showing for the current period, have been discussed in [Chapter XXIII] on “Reserves and Surplus.” There the illegitimate use of surplus as a dumping ground for items which it is desired to conceal was mentioned. To prevent this misuse of surplus the final section of the profit and loss statement is often shown as set forth above. Where, however, a separate statement of the surplus is included as a part of the exhibit of the condition for the fiscal period, the statement of profit and loss will, of course, end with the figure of net profit, if that profit is transferred to surplus, out of which all appropriations of profit to its various uses are made. If, however, appropriations of this period’s profits, as distinguished from the accumulated profits of other periods, are to be made for specific purposes, their disposition is best shown in a final appropriation section as a part of the current statement of profit and loss.

Comparative Statement of Profit and Loss

	Year Ended 19—	Year Ended 19—	Year Ended 19—
Gross Sales	$. . . . . .	$. . . . . .	$. . . . . .
Less Outward Freight, Allowances, and Returns	. . . . . .	. . . . . .	. . . . . .
Net Sales	$. . . . . .	$. . . . . .	$. . . . . .
Inventory beginning of year	$. . . . . .	$. . . . . .	$. . . . . .
Purchases, Net	. . . . . .	. . . . . .	. . . . . .
	$. . . . . .	$. . . . . .	$. . . . . .
Less Inventory end of year	. . . . . .	. . . . . .	. . . . . .
Cost of Sales	$. . . . . .	$. . . . . .	$. . . . . .
Gross Profit on Sales	$. . . . . .	$. . . . . .	$. . . . . .
Selling Expenses (itemized to correspond
with ledger accounts kept)	$. . . . . .	$. . . . . .	$. . . . . .
Total Selling Expense	$. . . . . .	$. . . . . .	$. . . . . .
General Expenses (itemized to correspond
with ledger accounts kept)	$. . . . . .	$. . . . . .	$. . . . . .
Total General Expense	$. . . . . .	$. . . . . .	$. . . . . .
Administrative Expenses (itemized to correspond
with ledger accounts kept)	$. . . . . .	$. . . . . .	$. . . . . .
Total Administrative Expense	$. . . . . .	$. . . . . .	$. . . . . .
Net Profit on Sales	$. . . . . .	$. . . . . .	$. . . . . .
Other Income:
Income from Investments	$. . . . . .	$. . . . . .	$. . . . . .
Interest on Notes Receivable, etc.	. . . . . .	. . . . . .	. . . . . .
Gross Income	$. . . . . .	$. . . . . .	$. . . . . .
Deductions from Income:
Interest on Bonded Debt	$. . . . . .	$. . . . . .	$. . . . . .
Interest on Notes Payable	. . . . . .	. . . . . .	. . . . . .
Total Deductions	$. . . . . .	$. . . . . .	$. . . . . .
Net Income—Profit and Loss	$. . . . . .	$. . . . . .	$. . . . . .
Add special credits to Profit and Loss	. . . . . .	. . . . . .	. . . . . .
Deduct special charges to Profit and Loss	. . . . . .	. . . . . .	. . . . . .
Profit and Loss for period	$. . . . . .	$. . . . . .	$. . . . . .
Surplus beginning of period	. . . . . .	. . . . . .	. . . . . .
	$. . . . . .	$. . . . . .	$. . . . . .
Dividends Paid	. . . . . .	. . . . . .	. . . . . .
Surplus ending of period	$. . . . . .	$. . . . . .	$. . . . . .

Content and Manner of Showing

Some problems in connection with the content of the various sections of the profit and loss summary and also with the manner of showing the content will now be taken up. The first item to be considered is the handling of the deductions from sales. On the Federal Reserve form of statement not only are sales returns and allowances deducted but also outfreight charges and, in some instances, other expenses which are regarded as direct selling costs as distinguished from the indirect costs shown in the group of selling expenses. Practice is not at all uniform in this regard. It should be stated that where the policy of the business is to sell goods f.o.b. destination, the outfreight charges may be regarded as a proper deduction from the figure of gross sales, as otherwise that figure is inflated by the item of freight, the cost of which is no part of the business organization nor is it under its control. Where, however, goods are only sold occasionally f.o.b. destination, the outward freight is more properly treated as a cost of making the sale in the same way as advertising. It should therefore be included in the group of selling expenses rather than be treated as a direct deduction from sales.

Supporting Schedules

With the object of presenting a bird’s-eye view of the profit and loss activities for the year, it is desirable that as little detail be shown on the face of the statement as may be necessary to furnish the information desired. The profit and loss statement under this method of treatment must be supported as to its detailed content by schedules giving the full information which may at times be valuable to proprietor or manager. The first supporting schedule may well be headed “Cost of Goods Sold.” Therein should be shown the statement of inventory on hand at the beginning of the period, goods purchased during the year, inward freight and carriage costs, purchase returns and allowances, and goods on hand at the close of the year, the result being the figure carried on the profit and loss summary. Where manufacturing is also carried on, this cost of goods schedule should include a statement of manufacturing activities, set up in the following order: raw materials used in manufacture which will be derived from a statement of raw materials inventory at the beginning, purchases, inward freight, purchase returns, and raw materials on hand at the close of the period. To this figure of raw materials consumed in manufacture should be added the direct labor costs for the period, the sum of the two giving the significant figure of prime costs. The addition to this of the factory expense set up in detail gives the cost of manufacture for the period.

Adjustment of Inventories

An adjustment should be made somewhere in this manufacturing section of the inventories of goods in process at the beginning and end of the period. This adjustment is usually made at the end of the manufacturing statement, but the position depends largely on the cost system in use and therefore the cost elements which make up the value of goods in process. If these values include raw materials, direct labor, and factory expense, and a separation of these elements is difficult or impossible, the adjustment is perhaps best made at the close of the manufacturing statement. Where, however, the elements referred to are easily separable, the difference between the cost of materials in the opening inventory of goods in process and the closing inventory should be added to the materials used in manufacture during this period or subtracted from them, as the case may be. Likewise, the difference between the labor items in the two inventories should be added to, or subtracted from, the direct labor cost for the current period. This makes possible an exact showing of the prime cost for the period.