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Siciliano04.qxd 2/8/2003 6:38 AM Page 57
The Income Statement: The Flow of Progress
Start with the inventory on hand at the beginning of the
month, valued at the total actual cost to make or buy it.
Add the cost of all the inventory purchased during the month, $175,000 57
which was intended to be used in making the company’s 275,000
products, either now or later.
Add the cost of the labor used to manufacture products
215,000
during the month.
Add in the other costs incurred by the company indirectly
related to making its products, such as plant electricity, 415,000
machine depreciation, supervisory salaries, and so on.
This is the total cost invested in inventory for sale during the
1,080,000
month.
Deduct the total cost of inventory still remaining unsold at the
(210,000)
end of the month.
The difference is the total cost of goods sold during the
870,000
month or the cost of manufacturing the goods sold.
Add the costs incurred to get the products to the customer,
30,000
such as delivery freight, commissions, etc.
This is the cost of sales for the month. $900,000
Figure 4-2. Cost of sales—a sample calculation for a manufacturing
company
Operating Expenses: Running the Business

This category includes all the operating costs of the business,
what it takes to keep the doors open and to support the sales of
the company’s products. Usually there are subcategories shown
on the income statement, as we’ve done in Figure 4-1, to show
the operating expenses for each of the major functional activi-
ties of the company.
These are typically the following:
• engineering or research and development
• sales and marketing
• general and administrative expenses