Accounting Principles - Merchandising Operations Study Notes

Chapter 5: Accounting for Merchandising Operations

Learning Objectives

• Prepare single-step and multiple-step income statements.

Merchandising Income Statement

Single-Step Income Statement

• Definition: A single-step income statement requires only one step to determine profit (or loss).
• Calculation: Subtract total expenses from total revenues.
• Reasons for Using Single-Step Format:
  • Simplicity: It is simple and easy to read.
  • Logical Structure: A company only realizes profit when total revenues exceed total expenses, thus logically dividing information into categories of revenues and expenses.

Structure of the Single-Step Income Statement

• Classification of Data: All data is classified into:
  1. Revenues
  2. Expenses

Multiple-Step Income Statement

• Definition: A multiple-step income statement is a more common and useful format than the single-step format.
• Features: It reports gross profit, giving a clearer picture of operational performance.
• Calculation Steps to Determine Profit (or Loss):
  1. Net Sales:
  • Formula: $Net ext{ }Sales = Sales - Sales ext{ }Returns - Sales ext{ }Allowances - Sales ext{ }Discounts$
  1. Gross Profit:
  • Formula: $Gross ext{ }Profit = Net ext{ }Sales - Cost ext{ }of ext{ }Goods ext{ }Sold$
  1. Profit from Operations:
  • Formula: $Profit ext{ }from ext{ }Operations = Gross ext{ }Profit - Operating ext{ }Expenses$
  1. Non-Operating Activities: Activities that are not related to operational performance.
  2. Final Profit Calculation:
  • Formula: $Profit = Profit ext{ }from ext{ }Operations ext{ } +/- Non ext{-}Operating ext{ }Activities$

Example of a Multiple-Step Income Statement

HIGHPOINT AUDIO & TV SUPPLY

• Income Statement for the Year Ended May 31, 2028
• Sales Revenue:
  • Sales: $Sales = 480,000$
• Calculation of Net Sales and Gross Profit:
  • Less: Sales Returns and Allowances: $16,700$
  • Less: Sales Discounts: $4,300$
  • Net Sales Calculation:
  • Net Sales: $Net ext{ }Sales = 480,000 - 16,700 - 4,300 = 459,000$
  • Cost of Goods Sold: $315,000$
  • Gross Profit Calculation:
  • Gross Profit: $Gross ext{ }Profit = Net ext{ }Sales - Cost ext{ }of ext{ }Goods ext{ }Sold = 459,000 - 315,000 = 144,000$
• 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 Calculation:
  • Total Operating Expenses: $Total = 45,000 + 19,000 + 17,000 + 16,000 + 8,000 + 7,000 + 2,000 = 114,000$
• Profit from Operations:
  • Profit from Operations: $Profit ext{ }from ext{ }Operations = Gross ext{ }Profit - Total ext{ }Operating ext{ }Expenses = 144,000 - 114,000 = 30,000$
• Non-Operating Activities:
  • Other Revenues:
  • Interest Revenue: $1,000$
  • Rent Revenue: $2,400$
  • Total Non-Operating Revenues Calculation:
    • Total Non-Operating Revenues: $1,000 + 2,400 = 3,400$
  • Other Expenses:
  • Interest Expense: $1,800$
  • Net Non-Operating Revenues Calculation:
  • Net Non-Operating Revenues: $Total ext{ }Non-Operating ext{ }Revenues - Other ext{ }Expenses = 3,400 - 1,800 = 1,600$
• Profit for the Year Calculation:
  • Profit for the Year: $Profit ext{ }for ext{ }the ext{ }Year = Profit ext{ }from ext{ }Operations + Net ext{ }Non ext{-}Operating ext{ }Revenues = 30,000 + 1,600 = 31,600$

Classified Balance Sheet

• Merchandise Inventory: Reported as a current asset alongside Accounts Receivable.