Question

Word has gotten around that you know to account and can explain it well. Jim, another of your friends has a unique business. During the summer he buys hats that cost $5.00 each and sells them at the beach for $12.00 each. Other than the cost of the hat, his only other expense last summer was $120 for parking. He sold 78 hats last summer. His accountant prepared a financial statement for him and he has several questions about the income statement. He asks:

1.What does the cost of goods sold and gross profit mean?
2.How much gross profit do I make on each hat?
3.Why show both gross profit and net income?
4.Using Jim's figures, calculate his cost of goods sold, gross profit and net income - SHOW YOUR CALCULATIONS

Answer 1

Gross profit is calculated by subtracting the cost of goods from the selling price, resulting in $7.00 profit per hat for Jim. By showing both gross profit and net income, we get a comprehensive view of profitability. Jim's cost of goods sold is $390, gross profit is $546, and net income after parking expenses is $426.

Step-by-step explanation:

Understanding Income Statements in Business

When it comes to understanding financial statements in Jim's hat business, Cost of Goods Sold (COGS) represents the direct costs attributable to the production of the goods sold. This includes the cost of the materials (hats) Jim used to sell his products. On the other hand, Gross Profit is the profit a company makes after deducting the costs associated with making and selling its products.

To calculate the gross profit per hat, you subtract the cost of each hat ($5.00) from the selling price ($12.00). Therefore, the gross profit on each hat would be $12.00 - $5.00 = $7.00.

Showcasing both gross profit and net income allows the business to see the profit being made just from the sale of goods versus the overall profit after all expenses, not just the cost of goods, have been deducted. The net income includes all expenses, providing a more accurate view of the company's profitability.

Now, let's calculate Jim's financial figures:

• Cost of Goods Sold (COGS): $5.00 (cost per hat) x 78 (hats sold) = $390
• Gross Profit: ($12.00 (selling price) - $5.00 (cost per hat)) x 78 (hats sold) = $546
• Net Income: $546 (gross profit) - $120 (parking expenses) = $426