Merchandising Financial Statements

The classified income statement for a merchandiser has three sections — revenue, cost of goods sold, and operating expenses — and the balance sheet gets a new formal name: the Statement of Financial Position.

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Key things to remember

1Classified income statement sections: Revenue, Cost of Goods Sold, Operating Expenses.
2Operating expenses split into Selling Expenses and Administrative Expenses.
3Net Income = Gross Profit − Total Operating Expenses.
4Statement of Financial Position = another name for the balance sheet.
5Interim financial statements are practical under a perpetual inventory system, since COGS and inventory stay current all year.

Everything from this unit finally lands on one document. A Classified Income Statement has three main sections: revenue, cost of goods sold, and operating expenses. This is a big step up from a service business's simple income statement, which only ever needed revenue and expenses.

Section	Contents
Revenue	Sales − Sales Returns and Allowances − Sales Discounts = Net Sales
Cost of Goods Sold	Opening Inventory + Net Purchases − Closing Inventory (its own schedule feeds this one line)
Gross Profit	Net Sales − Cost of Goods Sold
Operating Expenses — Selling	Costs of getting the sale: Delivery Expense, Sales Salaries, Advertising
Operating Expenses — Administrative	Costs of running the business generally: office salaries, rent, insurance, utilities
Net Income	Gross Profit − Total Operating Expenses

The classified income statement, top to bottom

Administrative Expense is an account used to record the expenses involved in the general operation of a business (office rent, office salaries, insurance) — kept deliberately separate from Selling Expenses (delivery, sales commissions, advertising) so a manager can see at a glance whether it costs too much to run the office, to run the sales floor, or both.

Fig 1The classified income statement: revenue, cost of goods sold, and operating expenses split into selling and administrative

The balance sheet's other name

The Statement of Financial Position is simply another name for a balance sheet — the same classified layout (current/fixed assets, current/long-term liabilities, owner's equity) you already know, now including Merchandise Inventory as a current asset.

Interim Financial Statements

Interim Financial Statements can be prepared under the perpetual inventory system — because a perpetual system keeps Merchandise Inventory and Cost of Goods Sold continuously up to date, a business can produce a reliable income statement and balance sheet at ANY point during the year (monthly or quarterly), not just after a year-end physical count. A periodic system, by contrast, cannot easily produce accurate interim statements, since it only knows true inventory and COGS after a physical count.

Completing the cycle

Nothing about the accounting cycle itself changes for a merchandiser: transactions are still journalized, posted, adjusted, summarized on a work sheet, reported on financial statements, and closed. The only difference is the NEW accounts (Merchandise Inventory, Purchases and its contras, Sales and its contras, HST accounts, the Allowance for Uncollectible Accounts) now flowing through every one of those familiar steps.

Worked examples

Reveal one step at a time and try to beat it to the next line.

Example 1

Using Trailside Outfitters' figures from earlier (Net Sales $260,000; Cost of Goods Sold $184,000), plus Selling Expenses of $38,000 and Administrative Expenses of $22,000, prepare a condensed classified income statement and find Net Income.

Example 2

A business's trial balance shows Delivery Expense $4,500, Office Rent $12,000, Sales Salaries $18,000, Office Salaries $9,000, and Advertising $3,200. Classify each account as Selling Expense or Administrative Expense, and find the total for each section.

Where marks get lost

Lumping selling and administrative expenses together instead of splitting them — the classified income statement specifically separates them.
Forgetting Cost of Goods Sold is its own section, distinct from operating expenses — it sits between Revenue and Gross Profit, not inside Operating Expenses.
Calling the balance sheet and the Statement of Financial Position two different reports — they are the exact same statement, just two accepted names for it.
Assuming interim statements require a special once-a-year process — under a perpetual system, they can be produced at any time because the records are always current.
Classifying Delivery Expense as Administrative — it is a Selling Expense, since it is a direct cost of completing a sale to a customer.

Flashcards 5

Classified Income Statement

Administrative Expense

Statement of Financial Position

Interim Financial Statements

+ 1 more

Practice

Which section comes immediately after Revenue on a classified income statement?

Office rent belongs in which section of the income statement?

Net Sales $410,000; Cost of Goods Sold $255,000; Selling Expenses $60,000; Administrative Expenses $45,000. Find Net Income.

What is another accepted name for the balance sheet?

Interim financial statements are most practical under which inventory system?

Name the two subcategories operating expenses are split into on a classified income statement.

Delivery Expense $6,000, Sales Commissions $14,000, Office Salaries $20,000, Insurance $3,000, Advertising $5,000. Find total Selling Expenses.

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