## Putting It Together: Merchandising Operations

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   Merchandise inventory, January 1, 20XX   Purchases, net $2,548,959 Subcategory, Cost of goods sold$457,897 1,456,222 66,231 Single Line $1,980,350 238,687 Single Line 1,741,663 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 1,741,663 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.