3.2: Merchandising Income Statement

The multi-step income statement is used to report revenue and expense activities for a merchandising business. It is an expanded, more detailed version of the single-step income statement.

The most significant cost that a merchandise business incurs is the cost of acquiring the inventory that is sold. It is important to match what was paid for an item to what it sells for. The multi-step income statement presents financialinformation so this relationship may easily be seen.

Here is a basic income statement for a merchandising business. Notice that Cost of Merchandise Sold, an expense account, is matched up with net sales at the top of the statement.

There are three calculated amounts on the multi-step income statement for a merchandiser - net sales, gross profit, and net income.

• Net Sales = Sales - Sales Returns - Sales Discounts
• Gross Profit = Net Sales - Cost of Merchandise Sold
• Net Income = Gross Profit - Operating Expenses

Net sales is the actual sales generated by a business. It represents everything that “went out the door” in sales minus all that came back in returns and in the form of sales discounts.

Gross profit is the same as “markup.” It is the difference between what a company paid for a product and what it sells the product for to its customer.

Net income is the business’s profit after all expenses have been deducted from the net sales amount.

A more complex manufacturing business may break out its operating expenses into two categories on the income statement: selling expenses and administrative expenses. Selling expenses are related to the people and effortsused to market and promote the product to customers. Administrative expenses relate to the general management of the business and may include costs such as the company president’s office and the human resources and accounting departments. An example is shown below.