This is part three in our Management Accountability series, and we're gonna be
discussing our merchandising companies. So the first thing we want to look at
here is the income statement for a merchandising company. Now remember a
merchandiser is a little bit different from a service company whereas a service
company produces a service or sells a service. A merchandising company sells a
product. They do not produce a product they simply sell a product that they
purchased from a wholesaler or someone else.
Also remember that gap states inventory is an asset until it is sold. Then it is
expensed as cost of goods sold. So link that back to your matching principle
that says we match expenses with the revenues those expenses created. So let's
look at our merchandising company income statement. First off we have sales
revenue. Unlike a service company that has service revenue here we're selling a
product so it's called sales revenue. Now from sales revenue we're going to have
two new accounts. One is called sales returns and allowances, one is called
sales discounts. Both of these accounts are called
contra-revenue accounts. Now think about revenues they carry a credit balance.
Contra-revenues will be the opposite. They will carry debit balances and they
will effectively reduce the net revenues. So from sales we're going to subtract
those contra-revenue accounts to get our net sales revenue. From our net sales
revenue we're going to subtract that cost of goods sold. So when we sell our
inventory we're going to expense the cost of those goods and that's called
cost of goods sold. So net sales revenue minus our cost of
goods sold that equals gross profit. From gross
profit we will subtract our operating expenses and that will give us our
operating income. Let's look at an example of a service company here. So
we're going to use the following information of a retail merchandiser to
compute the cost of goods sold. So we're not producing an income statement yet
we're just trying to compute the cost of goods sold. Now what I always like to do
here is create my T account. But before we get started let's look at two things
in the list over here that sometimes give problems. We have delivery expense
and we have Freight in. These are not the same thing.
A delivery expense as it sounds is an expense. It's a selling expense. It's when
the seller ships the good to the buyer therefore it's an expense to the seller.
Freight in on the other hand is when the buyer pays to get the goods to
themselves. That's called Freight in. Freight in is
not an expense. It's included as part of the cost of your inventory so it's very
important that you make the distinction between those two things as quickly as
possible. So let's start with our inventory T account. For me that's the
easiest way to calculate cost of goods sold. So looking at our list over here
they give us our beginning inventory,
they give me my ending inventory, they tell me my purchases. So let's just fill
in some information here. So my beginning inventory was $8200.
My purchases were $41,000 and just as we've discussed earlier Freight in is
not an expense to the buyer. Freight in is included as part of the cost of the
inventory so it would go in your inventory account as an increase of
$2,800 and they tell me my ending of $5,000. We want to calculate cost of
goods sold. None of the other items in this list goes into our inventory
account. Marketing expenses is an operating cost, it's not part of the cost
of our inventory. Revenues of course are revenues, delivery expense is another
operating cost, and website maintenance would also be an operating cost. So now
we have all of our debits and we know our ending inventory, so can we calculate
cost of goods sold? Sure we take all of our debits $8200 plus $41,000 plus
$2800, add those up, subtract your ending of $5000, and that will give you your cost
of goods sold of $47,000. Let's move on to a more comprehensive example. Here
we're going to use this information to prepare an income statement, but just as
before here we're not given cost of goods sold. To produce an income
statement, we need our cost of goods sold. So we're going to start step one is to
calculate your cost of goods sold. So again I'm going to use a t-account and
I'm gonna fill in all the information that I know. So they give me beginning of
what let's see January the 1st 2011. You need to watch your dates. December 31st
would be the end of the year so your beginning inventory would be
$15,300. They tell me my purchases of merchandise was
$25,000. Do I have Freight in in this case? None is listed therefore
I assume it's zero so there's no freight in and they do give me ending inventory of
$10,700. Just as before take all of your debits
subtract your ending that will give you cost of goods sold of
$29,600. Now we can create our income statement part two. We
start with our sales revenue. They tell me sales revenue was $55,000.
Remember from sales revenue we're going to subtract any contra
revenue accounts, sales discounts, sales returns and allowances. In this case we
do not have any of those so we can skip that step and go right to cost of goods
sold of $29,600. Subtract that from your sales revenue.
That will give you gross profit of $25,400
dollars. From gross profit you'll subtract all of your operating expenses,
utilities, rent, and sales commissions listed above and you will end up with
operating income of $15,050.