The income statement is the first financial statement that any small businesses should prepare. It shows how much money a business made as well as how much it spent. This, in turn, provides an indicator of cash flow and profitability. An income statement’s format depends on the type of operations the business uses to generate revenue. Some businesses, such as retailers and manufacturers, sell inventory, while others offer their clients services. The difference in treatment between the cost of services and the cost of selling inventory gives rise to these two formats. Show
Income Statement for MerchandisingMerchandising income statements separate income from operating activities from incidental revenue, such as interest revenue from a loan made to a customer. The 'top line' reports total sales less allowances and returns from operating activities, setting non-operating revenues aside to be added back in later. This is different to service companies who will report total revenue, since these businesses do not experience product discounts, faults and returns. Cost of Goods SoldInventory costs money even before putting it on the shelves or onto the production line. Income statement items for merchandising companies therefore include the cost of goods sold underneath net sales, reports Accounting Focus. Segregating the cost of goods from the remaining operating costs, analysts can assess the health of the merchandising company's operations. Gross margin, the ratio of net income after subtracting cost of goods sold, is a common indicator that analysts review. Service income statements do not include this component. Operating ExpensesRunning a business costs money. Payroll, rent, property taxes and advertising are just some of the usual line items that show up under operating expenses, suggests Accounting Tools. While service income statements arrive at net income before taxes and after subtracting expenses, merchandising statements must account for nonoperational cash flows. Any revenue, such as interest from a loan provided to a client, is added back in, and any expenses – such as interest payments on corporate debt – are subtracted back out. This new total is the merchandising company’s net income before tax. For both types of income statements, tax expenses are reported separately near the very end of the income statement. Even though merchandising companies and service companies conform to generally accepted accounting principles (GAAP), there are differences in the ways each prepares its financial statements, especially income statements, where most differences center around the existence of inventory. Key Takeaways
Merchandising CompanyA merchandising company buys tangible goods and resells them to consumers. These businesses incur costs, such as labor and materials, to present and sell products. Retail and wholesale companies are the two types of merchandising companies. Retail companies sell products directly to consumers, and wholesale companies sell products directly to retailers or other wholesalers. The operating cycle of a merchandising company is the time between the purchase of the product and the sale of that product. Service CompanyService companies do not sell tangible goods to produce income; rather, they provide services to customers or clients according to a specific expertise or specialty. Service companies sell their services, often charging base fees and hourly rates. Examples of service companies include consultants, accountants, financial planners, and insurance providers. Key Differences in the Income StatementsThe income statement shows financial performance from operations first and then separately discloses gains and losses that fall outside the regular scope of operations. The differences in income statements can be further understood by examining the balance sheets of both types of companies. For instance, inventory is a large percentage of the assets category for a merchandising company. As such, they tend to have less cash on hand than service businesses since their capital is tied up in illiquid assets. By contrast, service businesses' assets tend to be weighted toward accounts receivable. For a service business, the absence of inventory means receivables are a greater proportion of total assets. Both service and merchandising companies may experience gains or losses from non-operational sources. However, sources of the gains or losses differ between the two business types. For instance, a merchandiser might decide to redecorate a retail store and sell off fixtures for a profit. A service company might have a one-time gain from the sale of a patent. Lawsuits may also be a factor for both types of businesses. For merchandisers, lawsuits are often related to defective goods. Meanwhile, a service provider might be more likely sued for breach of contract. Both merchandising companies and service companies prepare income statements to help investors, analysts, and regulators understand their internal financial operations. Merchandising companies hold and account for product inventory, which makes their income statements inherently more complicated. Much of the inventory calculation is manifested through the line-item cost of goods sold, which is an expense account describing the cost of purchasing inventory and delivering it to customers. If you look at an income statement for a service company, you will not see a line item for the cost of goods sold. The nature of increases or decreases in net revenue for each type of company is also different. Service companies do not typically have enormous expense accounts, meaning that fluctuations in net revenue are almost entirely a function of generating sales. Manufacturing companies are less certain since a decrease in net revenue could be an increase in expenses or a decrease in revenues. Which items should be included in the income statement?The income statement presents revenue, expenses, and net income. The components of the income statement include: revenue; cost of sales; sales, general, and administrative expenses; other operating expenses; non-operating income and expenses; gains and losses; non-recurring items; net income; and EPS.
What is the first part of the income statement of a merchandising business?Expenses for a merchandising company must be broken down into product costs (cost of goods sold) and period costs (selling and administrative). Just like all income statements, the first line is revenue. In the case of a business that sells a product, we refer to revenue as Sales or Sales Revenue.
What are the two expenses classified in the income statement of a merchandising business?cost of goods sold and operating expense. There are two categories of expense, cost of goods sold and operating expenses. The cost of goods sold includes the cost used in buying the merchandise that was sold.
What items appear in financial statements of merchandising companies?merchandise Inventory, Sales (of goods), Cost of Goods Sold, Sales Discounts, and Sales Returns and Allowances (and possibly Delivery Expense).
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