It’s worth looking one last time at how a merchandising company prepares the first part of an income statement. When we were looking at a service business, we had one line called Service Revenue. Now, with merchandising companies, we have the following basic calculation:
Net revenue − COGS = Gross Profit
For a company using a periodic inventory system, the calculation is expanded like this:
Sales Revenue, net | $2,548,959 | ||
---|---|---|---|
Subcategory, Cost of goods sold | |||
Merchandise inventory, January 1, 20XX | $457,897 | ||
Purchases, net | 1,456,222 | ||
Freight in | 66,231 | ||
Goods available for sale | Single Line | $1,980,350 | |
Less merchandise inventory, December 31, 20XX | 238,687 | ||
Cost of goods sold | Single Line | 1,741,663 | |
Gross profit | Single Line$807,296Double Line |
Where net sales is equal to Gross Sales (the invoiced amount) minus Sales Returns and Allowances and minus Sales Discounts.
Compare the above calculation to one from the same company if it used the perpetual system where all inventory transactions run through only two accounts—Merchandise Inventory and COGS—and inventory is being updated constantly for both purchases and sales:
Sales Revenue, net | $2,548,959 |
---|---|
Costs of goods sold | 1,741,663 |
Gross profit | Single Line$807,296Double Line |
The results are the same, as long as all other assumptions are the same, but the method is completely different.
In the next module, we’ll study how to come up with the item cost per unit when costs are changing all the time.