Accounting Principles Notes

Chapter 5: Accounting for Merchandising Operations

Learning Objective

• Objective 5: Prepare single-step and multiple-step income statements.

Merchandising Income Statement - Single Step

• Definition: A single-step income statement requires only one calculation to determine profit or loss:
  • Profit or Loss = Total Revenues - Total Expenses
• Rationale for Using Single-Step Format:
  • Simplicity: Easy to understand and read.
  • Profit Realization: A company does not recognize any profit until total revenues exceed total expenses, hence it is logical to categorize information into revenues and expenses.

Structure of Single-Step Income Statement

• All financial data is classified into one of two categories:
  1. Revenues
  2. Expenses

Merchandising Income Statement - Multiple Step

• Definition: A multiple-step income statement provides a more detailed presentation and indicates gross profit.
• Advantages: More common in practice, offers detailed insights into various components of income.

Steps in Preparing a Multiple-Step Income Statement:

1. Net Sales Calculation:
   • Net Sales = Sales - (Returns + Allowances + Discounts)
2. Gross Profit Calculation:
   • Gross Profit = Net Sales - Cost of Goods Sold
3. Profit from Operations Calculation:
   • Profit from Operations = Gross Profit - Operating Expenses
4. Non-Operating Activities:
   • Activities not directly related to core operations (e.g., interest revenue, rent revenue).
5. Final Profit Calculation:
   • Profit = Profit from Operations ± Non-Operating Activities

Example: Multiple-Step Income Statement

• Company Example: HIGHPOINT AUDIO & TV SUPPLY

• Income Statement for the Year Ended May 31, 2028

  Income Statement Items	Amount
  Sales Revenue	$480,000
  Less: Sales Returns and Allowances	$16,700
  Less: Sales Discounts	$4,300
  Net Sales	$459,000
  Cost of Goods Sold	$315,000
  Gross Profit	$144,000
  Operating Expenses
  - Salaries Expense	$45,000
  - Rent Expense	$19,000
  - Utilities Expense	$17,000
  - Advertising Expense	$16,000
  - Depreciation Expense	$8,000
  - Delivery Expense	$7,000
  - Insurance Expense	$2,000
  Total Operating Expenses	$114,000
  Profit from Operations	$30,000
  Other Revenues
  - Interest Revenue	$1,000
  - Rent Revenue	$2,400
  Total Non-Operating Revenues	$3,400
  Other Expenses
  - Interest Expense	$1,800
  Net Non-Operating Revenues	$1,600
  Profit for the Year	$31,600

Classified Balance Sheet

• Merchandise Inventory:
  • Reported as a current asset on the balance sheet, under the section for accounts receivable.

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