Lesson 029 - Accounting for Merchandising Operations 3: Income Statement

Summary

This educational video script covers the fundamentals of preparing an income statement for merchandising operations. It introduces an additional adjusting entry for merchandise inventory, explains the process of adjusting entries, and outlines the steps to calculate net sales and cost of goods sold. The script also discusses two methods of presenting the income statement: the functional expense method and the nature of expense method. It concludes with a walkthrough of preparing an income statement using sample data, emphasizing the importance of understanding merchandising accounts and adjusting entries in financial reporting.

Takeaways

• 📊 The focus of the lesson is on preparing the income statement for merchandising operations.
• 🔧 A new adjusting entry is introduced for merchandise inventory, in addition to previous entries like prepaid expenses and depreciation.
• 💡 The adjusting entry involves debiting the profit or loss summary and crediting merchandise inventory at the beginning and end of the accounting period.
• 📈 The income statement for merchandising operations calculates net sales and gross profit, which is net sales minus cost of goods sold.
• 🛒 Net sales are determined by subtracting sales returns, allowances, and discounts from gross sales.
• 📦 The cost of goods sold is calculated by adding the beginning inventory to net purchases and subtracting the ending inventory.
• 🧾 There are two methods for presenting the income statement: the function of expense method and the nature of expense method.
• 📉 The function of expense method classifies expenses as cost of goods sold, while the nature of expense method aggregates them by nature.
• 📂 The pro forma calculation involves gross sales minus contra sales to obtain net sales, and a detailed calculation of cost of goods sold.
• 📝 In the example, the income statement shows total revenues minus operating expenses to derive net income, using the function of expense method.

Q & A

What is the main focus of the video script provided?

The main focus of the video script is to discuss the preparation of the income statement for merchandising operations, including the necessary adjusting entries and the process of calculating net sales and cost of goods sold.

What is an adjusting entry and why is it necessary in merchandising operations?

An adjusting entry is a journal entry made at the end of an accounting period to adjust revenues and expenses to reflect the actual financial performance of the company. In merchandising operations, it is necessary to make adjusting entries for merchandise inventory to ensure that the income statement accurately reflects the cost of goods sold and the ending inventory.

What is the difference between the periodic and perpetual inventory recording systems?

The periodic inventory system records inventory transactions only at the end of an accounting period, while the perpetual inventory system records each inventory transaction as it occurs. The script mentions that the accounting process for adjusting entries is the same for both systems in merchandising companies.

How is net sales calculated in a merchandising income statement?

Net sales are calculated by subtracting sales returns and allowances and sales discounts from gross sales. The formula provided in the script is: Net Sales = Gross Sales - Sales Returns and Allowances - Sales Discounts.

What is the formula to calculate cost of goods sold in a merchandising operation?

The cost of goods sold is calculated using the formula: Cost of Goods Sold = Beginning Inventory + Net Purchases - Ending Inventory. Net Purchases are calculated by subtracting purchase returns and allowances and purchase discounts from gross purchases.

What are the two methods of presenting the income statement mentioned in the script?

The two methods of presenting the income statement mentioned are the 'function of expense method' and the 'nature of expense method'. The former classifies expenses according to their function, while the latter aggregates expenses according to their nature.

What is the purpose of the handouts mentioned in the script?

The handouts are meant to provide additional information and examples to help understand the concepts discussed in the video, such as the computation of net sales, net purchases, and the preparation of the income statement using the function of expense method and the nature of expense method.

How does the increase or decrease in merchandise inventory affect the income statement?

An increase in merchandise inventory is shown as a negative figure in the income statement under the function of expense method, while a decrease is shown as positive. This reflects the impact of inventory changes on the cost of goods sold and, consequently, on the net income.

What are some of the operating expenses included in the income statement of a merchandising company?

Some of the operating expenses mentioned in the script include salaries, utilities, rent, and depreciation. These expenses are subtracted from the total revenues to calculate the net income.

What is the closing entry process for a merchandising company as described in the script?

The closing entry process for a merchandising company involves transferring the balances of certain accounts to the capital account. This includes sales returns and allowances, sales discounts, purchases, purchase returns and allowances, purchase discounts, freight in, operating expenses, and net income.

Outlines

00:00

📈 Introduction to Merchandising Accounting

This paragraph introduces the topic of accounting for merchandising operations, focusing on the preparation of the income statement. It mentions the need to understand an additional adjusting entry for merchandise inventory, which is crucial for closing the beginning inventory and recording the ending inventory. The paragraph also highlights the slight differences in account titles related to merchandising operations compared to service operations, emphasizing the importance of adjusting entries and the accounting process for a merchandising company.

05:10

🧮 Calculating Net Sales and Cost of Goods Sold

The second paragraph delves into the computation of net sales by subtracting sales returns, allowances, and discounts from gross sales. It also explains the process of determining the cost of goods sold, starting with the beginning inventory and adding purchases made during the period to arrive at the cost of goods available for sale. The paragraph further discusses the concept of net purchases, which involves adjusting for purchase returns, allowances, and discounts to arrive at the actual cost of goods sold.

10:11

📊 Methods of Presenting the Income Statement

This paragraph discusses two methods of presenting the income statement: the functional expense method and the nature of expense method. It provides an example of preparing an income statement using the functional expense method, which involves calculating net sales, cost of goods sold, and operating expenses to arrive at the net income. The paragraph also mentions the need to download handouts for further understanding and provides a step-by-step guide on how to compute for net sales and net purchases.

15:11

📋 Preparing the Income Statement Using Different Methods

The fourth paragraph continues the discussion on preparing the income statement, this time focusing on the nature of expense method. It explains how to calculate total revenues, which includes net sales, other income, and the change in merchandise inventory. The paragraph also provides a detailed example of how to compute the net income by subtracting total deductions and expenses from revenues. It emphasizes the importance of understanding both methods for academic and practical purposes.

20:16

🙏 Closing Remarks and Upcoming Lesson

In the final paragraph, the speaker concludes the lesson with a reminder of the next topic, which is the periodic and perpetual inventory systems. They also include a biblical proverb to encourage trust in God's guidance, emphasizing the importance of wisdom and understanding in all endeavors. The speaker thanks the audience and wishes them a great day, ending the video script on a positive and inspirational note.

Keywords

💡Merchandising Operations

Merchandising operations refer to the process of buying and selling goods, which is the core activity of a retail business. In the video, the focus is on how to prepare an income statement for merchandising operations, highlighting the unique accounting considerations for businesses that deal with inventory.

💡Income Statement

An income statement is a financial report that summarizes a company's revenues, costs, and expenses during a specific period. The video discusses the preparation of an income statement for a merchandising company, detailing the steps and calculations involved.

💡Adjusting Entries

Adjusting entries in accounting are made to ensure that revenues and expenses are properly matched and recorded in the correct accounting period. The script mentions a new adjusting entry related to merchandise inventory, which is crucial for reflecting the true financial position of a merchandising company.

💡Beginning Inventory

Beginning inventory is the value of goods available for sale at the start of an accounting period. The script explains how it is used in the adjusting entry process to close the inventory amount at the start of the period and record it at the end.

💡Net Sales

Net sales represent the total sales revenue minus any sales returns, allowances, and discounts. The video script provides a formula to calculate net sales, which is a key component in determining the gross profit of a merchandising company.

💡Cost of Goods Sold (COGS)

Cost of goods sold is the direct cost attributable to the production of the goods sold in a period. In the script, COGS is calculated by starting with the beginning inventory, adding purchases and freight in, and then subtracting the ending inventory.

💡Gross Profit

Gross profit is the profit a company makes after deducting the costs associated with making and selling its products, but before deducting overhead costs. The video explains that gross profit is calculated by subtracting COGS from net sales.

💡Net Income

Net income is the final profit after all revenues, costs, and expenses have been accounted for. The script describes how to arrive at net income by subtracting operating expenses from the gross profit plus other income.

💡Worksheet

A worksheet in accounting is a document used to prepare and organize the data needed for financial statements. The script mentions the importance of listing account titles related to merchandising on a worksheet when preparing an income statement.

💡Perpetual vs. Periodic Inventory System

The perpetual inventory system updates inventory records in real-time with each transaction, while the periodic system updates inventory only at certain times, such as at the end of an accounting period. The script hints at the next lesson, which will cover these inventory systems in more detail.

💡Closing Entries

Closing entries are accounting entries made at the end of an accounting period to transfer the balances of temporary accounts to the permanent owner's equity account. The script briefly mentions the process of closing entries, which is part of the accounting cycle for a merchandising company.

Highlights

Introduction to preparing the income statement for merchandising operations.

Learning a new adjusting entry for merchandise inventory.

Explanation of the adjusting entry: Debit profit or loss summary, credit merchandise inventory beginning.

Understanding the difference between periodic and perpetual inventory recording systems.

Listing account titles related to merchandising for worksheets.

Pro forma calculation for the merchandising income statement.

How to compute net sales by adjusting for sales returns, allowances, and discounts.

Calculating the cost of goods sold starting from beginning inventory and purchases.

Distinguishing between gross purchases and net purchases with the inclusion of freight in.

Two methods of presenting the income statement: function of expense and nature of expense.

Instructions on downloading handouts for income statement preparation.

Detailed computation of net sales using provided sales figures.

Explanation of how to calculate net purchases and cost of goods sold.

Process of preparing the income statement using the function of expense method.

How to prepare the income statement using the nature of expense method.

Final income statement presentation with net income calculation.

Importance of understanding both merchandising and service accounting processes.

Closing thoughts with a biblical proverb emphasizing trust and wisdom.

Transcripts

[Music]

[Music]

hello everybody so today we will be

discussing

still accounting for merchandising

operations and our focus

for today is the income statement how do

we prepare

the income statement for merchandising

operations

okay let's start

so we have a new adjusting entry that we

need to learn for today so apart from

the adjusting entries that we learned in

the previous lessons

regarding prepaid expenses deferrals

depreciation

you will still be needing that however

that the ganache

knowledge know about an additional

adjusting entry

relating to the adjustments in

merchandise inventory

so as you can see the first adjusting

entry is debit

profit or loss summary credit

merchandise inventory

beginning which is used to close the

beginning inventory

inventory amount nothing at the

beginning of the fear

of the period records

merchandise inventory

at the end of the accounting period

crediting profit or loss summary

which is the record ending inventory

pero remember

between periodic versus perpetual

inventory recording system pero for now

at adjusting entries

the accounting process for a

merchandising company

is still the same with that of service

so

we have slight changes because of the

account titles that are

related to merchandising which we need

to take

effect and list down these account

titles

under merchandising for worksheets so

for example itapo ayan so after punan

capital

sales returns and allowances sales

discount

purchases purchase returns and

allowances purchase discount

and then freight in sales salaries

expense and

all other things that related some

merchandising so gandunparenawanpo

changes because of the new account

titles

related to merchandising that you need

to put and you need to consider

in preparing the worksheet but preparing

the worksheet

as how i taught you in the previous

lessons

it would still be the same

okay so now we will be talking about

the merchandising income statement okay

the pro forma calculation

in preparing the merchandising income

statement is like this

net sales

um

sold pakistan

the difference between net sales and

cost of goods sold will give you

gross profit so madeline

and gross

equation okay so net sales minus cost of

goods sold is gross profit

however some companies are not

uh 100 merchandising predict businesses

revenue minus expenses

in order for us to get your net income

okay so prepared in a merchandising

income statement

in order for us to get your total

revenue less

expenses nothing which is your net

income so isa

how do we compute for your net sales

video so net sales is equals to gross

sales

minus sales returns and allowances

sales discount in order for you to get

your

net sales

on cost of goods sold okay we start with

your beginning inventory how much

is your inventory at the beginning of

the accounting period

inventory nasa warehouse

now if you add beginning inventory and

all of the

purchases that you made during that

period that will give you cost of goods

available for sale

ebay sabihin on cost of goods available

for sale

inventory now

end of the accounting period

and warehouse physical inventory

inventory at the end of the period cost

of goods available for sale anglais

we have six teddy bears not available

for sale

tapos

which is what we call net purchases net

purchases

is gross purchases

in so if you remember the basa binaten

purchases

in order for the inventory to be able to

arrive at its present location or

condition

because freight in is an adjunct account

to purchases

so that is your total purchases and

unless

any purchase returns and allowances and

purchase discount to get

your net purchases okay so i hope you

understand that

for our merchandising income statement

and we're ready to prepare

the income statement

okay so we have two methods of

presenting the income statement it might

either be

the function of expense method which

classifies expenses according to their

function

as cost of goods sold and the nature of

expense method

which expenses are aggregated according

to their nature

and not by function in order for us to

properly understand

these two methods we will be preparing

the income statement

so please download houndout029

and the link is available in the

description box

okay so let's try so if you already have

the handouts with you

yandinpo young gavin's handouts so we

have the following information

sales the

sales 900.000 and other income taps

purchases operating expenses and then

information about the beginning

and ending balance of your inventory

okay so let's

first try the function of expense method

is a function as cause of goods sold

okay so we will first prepare or

competing

information and note number two

i significant accounting policies so

usually um

information about cash i nasa note

number three

tapas accounts receivable note number

four then so on and so forth so for

example

nasa note number seven a tio for net

sales

okay so let's first compute for your net

sales on that sales point

formula so gross sales is nine hundred

thousand

less sales returns and allowances of

fifteen thousand and sales discount of

ten thousand

for a total contra sales of twenty five

thousand

will give you net sales of eight hundred

seventy five thousand

next is net purchases

okay so using the formula that i gave

you earlier

gross purchases of three hundred

thousand add net in your freight in

the eighty thousand will give you total

purchases of three hundred

eighty thousand less purchase returns

and allowances of twenty thousand in

purchase discount of ten thousand

will give you a contra purchases amount

of thirty thousand

net purchases is 350

000.

net purchases

cost of goods sold so the beginning

inventory

the cost of the inventory at the

beginning of the period

was a warehouse 120 000.

worth 350 000. so

is worth 470 000 because of goods

available for sale

less ending inventory

worth one hundred fifty thousand so and

the bentamo

is worth three hundred twenty thousand

okay and then uh summer

expenses salaries utilities rent and

depreciation

which will give you total operating

expenses of 220 000.

notes the financial statements

income statement okay so excellent

retail company income statement for the

month ended

april 30 2020.

since computer putting on net sales

net sales is 875 000

less cost of goods sold computer input

cost of goods sold with this which is

320 000.

so para and punyan analyze me income

statement

the inventory worth three hundred twenty

thousand aina bentana

worth eight hundred seventy five

thousand

five hundred

which will give us a total revenue of

600 000

minus operating expenses of 220

000 for a net income of 380 000

and that's how you prepare an income

statement under

the function of expense method

net sales of 875 000

45 000 other income total revenues

is increase or decrease in merchandise

inventories

inventory

income statement the nature of expense

method

bug increase in merchandise inventory

negative

but decrease in merchandise inventory

positive again uh increase in

merchandise inventory

negative but decrease in merchandise

inventory

positive so in our case the increase on

merchandise inventory

kaya negative then arena tenuonet

purchases na pina kagasto san mon 350

000

and then expenses small worth 70 60 50

and 40 000

to give you total deductions and

expenses of 540

000. then

revenues of 920 000 minus

deductions and expenses of 540 000

will give us a net income of 380 000

and that's how you prepare the income

statement

under the nature of expense method

further input you must prepare

non-functional multi-step presentations

and then beginning inventory hunger

computer net purchases to get their cost

of goods available for sale

less ending inventory uh cost of goods

sold that's gonna be

net sales minus cost of goods sold gross

profit add other income total revenue

and then less expenses

net income so actually

in actual practice

financial

financial statements to explain

everything and then paramas malini's

face

for academic purposes

okay but either way

income statement revenue minus expenses

accounting process closing entries

so and then purchase returns in

allowances purchase discount

other income

credit balances and then

sales returns and allowances sales

discount purchases freight in

atlanta expenses

net income i cannot close nathan to the

capital

account okay so it's the same accounting

process

it's just that

related merchandising okay

so our next lesson is about periodic and

perpetual inventory system

is a proverbs chapter 3 verse 5 to 6

trust in the lord with all your heart

and do not lean

on your own understanding in all your

ways acknowledge him and he

will make straight your paths

and wisdom always trust him with all

[Music]

thank you and have a great day

[Music]

you