Understanding Financial Statements for Merchandising Businesses

🔑Merchandising businesses include merchandise inventory and estimated returns inventory on their balance sheet as current assets.

🔑The income statement for merchandising businesses is a multiple-step statement that provides more information on profits from the sale of merchandise versus operating expenses.

🔑Calculating gross profit involves subtracting the cost of merchandise sold from revenues derived from the sale of goods.

🔑Operating income is obtained by reducing gross profit by operating expenses, representing the income earned from normal business operations.

🔑Net income is determined by adjusting operating income for other non-operating revenues or expenses that do not directly relate to day-to-day operations.

What assets are included on the balance sheet of a merchandising business?

—Merchandise inventory and estimated returns inventory are included on the balance sheet of a merchandising business as current assets.

How is the income statement different for a merchandising business compared to other businesses?

—The income statement for a merchandising business is a multiple-step statement that provides more information on profits made from the sale of merchandise versus operating expenses.

What is gross profit?

—Gross profit is the profit made purely on the merchandise sold, obtained by subtracting the cost of merchandise sold from revenues derived from the sale of goods.

What is operating income for a merchandising business?

—Operating income for a merchandising business is the income earned from normal business operations, obtained by reducing gross profit by operating expenses.

How is net income calculated for a merchandising business?

—Net income for a merchandising business is determined by adjusting operating income for other non-operating revenues or expenses that do not directly relate to day-to-day operations.

00:08At the end of the accounting cycle, all businesses, including merchandising businesses, prepare financial statements.

00:12Merchandising businesses have slight differences in their income statement and balance sheet compared to other businesses.

00:24The balance sheet of a merchandising business includes merchandise inventory and estimated returns inventory as current assets.

01:02The balance sheet for a merchandising business includes customer refunds payable as a liability.

01:53Merchandising businesses use a multiple-step income statement instead of a single-step income statement.

02:20The first step in preparing a multiple-step income statement is calculating gross profit.

02:47Operating income is the income earned from normal business operations.

03:21Net income is calculated by adjusting operating income for other non-operating revenues or expenses.