Merchandising
Business
© Copyright Doug Hillman 1999
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Merchandising Income
Statement
Net Sales
 Cost of Goods Sold
 Gross Margin
 Operating Expenses
 Net Operating Margin

© Copyright Doug Hillman 1999
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Merchandising Income
Statement
Other Revenues and Expenses
 Net Income before Taxes
 Income Tax Expense
 Net Income

© Copyright Doug Hillman 1999
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Net Sales
Sales
› Total or gross sales of merchandise
 Trade discounts
› Percentage reduction from list price
 Sales returns and allowances
› Reduction of price after sale
› Return of unacceptable merchandise

© Copyright Doug Hillman 1999
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Net Sales
Sales Discounts
› Discount for payment within a stated
period
 2/10, n/30
› 2% discount if paid within 10 days
› Gross amount due in 30 days

© Copyright Doug Hillman 1999
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Net Sales
Gross sales revenue
Deduct: Sales returns and allowances
Sales discounts
Net sales revenues
© Copyright Doug Hillman 1999
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Merchandise Inventory
Systems
Periodic inventory system
› Determine cost of goods sold and
inventory balance only at end of each
accounting period
 Perpetual inventory system
› Determine cost of goods sold and
inventory balance after each sale.

© Copyright Doug Hillman 1999
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Cost of Goods Sold: Periodic
Merchandise inventory, beginning
Purchases
Transportation in
Gross delivered cost of purchases
Deduct: Purchases returns and allowances
Purchases discounts
Net cost of purchases
Cost of goods available for sale
Deduct: Merchandise inventory, ending
Cost of goods sold
© Copyright Doug Hillman 1999
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Purchases
Records the cost of all merchandise
bought for resale
 Recorded at invoice cost

© Copyright Doug Hillman 1999
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Transportation In
FOB shipping point
› Buyer is owner during transit and is
responsible for transportation costs
 FOB destination
› Seller is owner during transit and is
responsible for transportation costs

© Copyright Doug Hillman 1999
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Purchases Returns and
Allowances
Contra account to purchases
 Records
› Price concessions after purchase
› Returns of merchandise

© Copyright Doug Hillman 1999
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Purchases Discounts
Contra account to purchases
 Records
› Cash discounts allowed for payments
within discount period

© Copyright Doug Hillman 1999
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Net Cost of Purchases
Purchases
Transportation in
Gross delivered cost of purchases
Deduct: Purchases returns and allow
Purchases discounts
Net cost of purchases
© Copyright Doug Hillman 1999
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Merchandise Inventory
Cost of merchandise on hand
 Amount determined by
› Physical count of units on hand
› Pricing at respective costs

© Copyright Doug Hillman 1999
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Cost of Goods Sold: Periodic
Merchandise inventory, beginning
Purchases
Transportation in
Gross delivered cost of purchases
Deduct: Purchases returns and allowances
Purchases discounts
Net cost of purchases
Cost of goods available for sale
Deduct: Merchandise inventory, ending
Cost of goods sold
© Copyright Doug Hillman 1999
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Gross Margin on Sales
Difference between net sales and cost of
goods sold
 Gross means must still deduct expenses

© Copyright Doug Hillman 1999
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Operating Expenses
Selling expenses
› Expenses incurred in advertising,
selling, and delivering
 General and administrative expenses
› Other operating expenses such as
office expenses, computer services,
and executive salaries

© Copyright Doug Hillman 1999
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Net Operating Margin
Gross margin
 Less operating expenses

© Copyright Doug Hillman 1999
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Other Revenue and Expenses
Revenues and expenses that do not
relate to the principal activity of the
business
 Separation permits calculation of net
operating margin without influence of
these nonoperating items

© Copyright Doug Hillman 1999
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Income Tax Expense
Corporations must pay taxes on income
 Calculation prescribed by federal and
state laws

© Copyright Doug Hillman 1999
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Net Price Method
Purchases discounts lost method
 Record the purchase at invoice price
less cash discount
 If paid after discount period lapses, extra
cost recorded as Purchases Discount
Lost

© Copyright Doug Hillman 1999
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Analyzing Information
Are net sales increasing or decreasing?
 What is percentage change in net
sales?
 Is percentage of cost of goods sold to
net sales increasing or decreasing?

© Copyright Doug Hillman 1999
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Analyzing Information
Is gross margin percent increasing or
decreasing?
 Is percentage of operating expenses to
net sales increasing or decreasing?
 Is gross margin percent increasing or
decreasing?
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© Copyright Doug Hillman 1999
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