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Merchandising Income Statement

 

The merchandising company differs from the service company in that it earns income by buying and selling merchandise rather than by offering services. In the simplest case, the income statement for a service company consists only of revenues and expenses. The income statement for a merchandising company has three major parts:

  1. Revenues from Sales,
  2. Cost of Goods Sold, and
  3. Operating Expenses.

Revenue from Sales

 

The revenue from the sales section shows gross sales, with contra-revenue accounts deducted to arrive at net sales.

 

Gross Sales   $xxx
Less: Sales Returns and Allowances $xxx  
  Sales Discounts xxx (xxx)
Net Sales   $xxx

 

Cost of Goods Sold

 

Net purchases are calculated by subtracting the purchases returns and allowances and the purchases discounts from gross purchases, and then adding any freight-in charges on the purchases:

 

Gross Purchases - Purchases Returns and Allowances - Purchases Discounts + Freight-in = Net Purchases

To compute the cost of goods sold, add net purchases to the beginning merchandise inventory to determine the goods available for sale:

 

Beginning Merchandise Inventory + Net Purchases = Goods Available for Sale

 

Then, subtract ending merchandise inventory from the goods available for sale:

 

Goods Available for Sale - Ending Merchandise Inventory = Cost of Goods Sold

 

The Cost of Goods Sold section of a merchandising company's multi-step income statement would look something like:

 

Merchandise Inventory, January 1 200x     $xxx  
Purchases   $xxx    
Less: Purchases Returns and Allowances $xxx      
  Purchases Discounts xxx (xxx)    
      $xxx    
Freight-In   xxx    
Net Purchases     xxx  
Goods Available for Sale     $xxx  
Merchandise Inventory, December 31, 200x     (xxx)  
Cost of Goods Sold       xxx

 

Operating Expenses

 

The operating expenses section divides the expenses into categories, such as

  1. selling expenses and
  2. general and administrative expenses.

Selling expenses are those expenses related to marketing the company's products such as sales salaries, sales commissions, advertising, etc.

 

General and Administrative expenses are related to the operation of the company's offices and not marketing of the products. Examples include office salaries, depreciation on office equipment, rent expense for office building, and property taxes on the office building.

 

An example of the Operating Expenses section of the Income Statement would be:

 

Operating Expenses:        
  Selling Expenses:        
    Sales Salaries Expense   $xxx    
    Sales Commissions Expense   xxx    
    Advertising Expense   xxx    
  Total Selling Expenses     $xxx  
  General and Administrative Expenses:        
    Office Salaries Expense   $xxx    
    Depreciation Expense, Office Equipment   xxx    
    Office Rent Expense   xxx    
  Total General and Administrative Expenses     xxx  
Total Operating Expenses       xxx

 

Income Statement for a merchandising concern

 

Gross Margin from Sales is the difference between Net Sales and the Cost of Goods Sold. Net income is the difference between gross margin from sales and operating expenses. Merchandisers must sell their merchandise for more than cost to pay operating expenses and earn and adequate profit.

 

A complete multi-step Income Statement would look like:

 

Revenue from Sales:        
Gross Sales       $xxx
Less: Sales Returns and Allowances     $xxx  
  Sales Discounts     xxx (xxx)
Net Sales       $xxx
Cost of Goods Sold:        
Merchandise Inventory, January 1 200x     $xxx  
Purchases   $xxx    
Less: Purchases Returns and Allowances $xxx      
  Purchases Discounts xxx (xxx)    
      $xxx    
Freight-In   xxx    
Net Purchases     xxx  
Goods Available for Sale     $xxx  
Merchandise Inventory, December 31, 200x     (xxx)  
Cost of Goods Sold       (xxx)
Gross Margin from Sales       $xxx
Operating Expenses:        
  Selling Expenses:        
    Sales Salaries Expense   $xxx    
    Sales Commissions Expense   xxx    
    Advertising Expense   xxx    
  Total Selling Expenses     $xxx  
  General & Administrative Expenses:        
    Office Salaries Expense   $xxx    
    Depreciation Expense, Office Equipment   xxx    
    Office Rent Expense   xxx    
  Total General & Administrative Expenses     xxx  
Total Operating Expenses       (xxx)
Net Income       $xxx