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.