Q. Example of Income statement of a merchandising firm?
To recapitulate the more important relationships in the income statement of a merchandising firm in equation form
- Net sales = Gross sales - Sales discounts + Sales returns as well as allowances.
- Net purchases = Purchases - Purchase discounts + Purchase returns as well as allowances.
- Net cost of purchases = Net purchases + Transportation-in.
- Cost of goods sold = Beginning inventory + Net cost of purchases - Ending inventory.
- Gross margin = Net sales - Cost of goods sold.
- Income from operations = Gross margin - Operating selling and administrative expenses.
- Net income = Income from operations + Non-operating revenues - Non-operating expenses.
Every of these relationships are important because of the way it relates to an overall measure of business profitability. For instance a company may produce a high gross margin on sales. But because of large sales commissions and delivery expenses the owner may realize only an extremely small percentage of the gross margin as profit. The classification in the income statement permits a user to focus on the whole picture as well as on how net income was derived statement relationships.