Putting It Together: Merchandising Operations

A group of 3 people meeting together.

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:

Geyer Co.
Income Statement (partial)
For the year ended December 31, 20XX
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:

Geyer Co.
Income Statement (partial)
For the year ended December 31, 20XX
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.