Merchandising Business:

Financial Statements
 Cost of Goods Sold

• Merchandising businesses have the extra cost

of inventory compared to service businesses
• This is an Income Statement amount called
“Cost of Goods Sold” aka “COGS”
Balance Sheet
 The Inventory Cycle

• The goal is to sell inventory quickly thus inventory moves in

and out of the business frequently
• SO…
• 1) There is inventory to begin the accounting period with.
• 2) Merchandise is sold and moves out throughout the
inventory period.
• 3) Merchandise is replaced by the purchase of new stock
from time to time.
• 4) The ending inventory should be more or less the same as
the beginning inventory.
 Merchandise Inventory
• COGS is an expense account so it goes on the Income
Statement
• Formula to calculate the COGS figure

Cost of Beg. Inv

+ Cost of Net Purchases
+ Freight
- Cost of Ending inventory
= Cost of Goods sold
Income Statement
 Income Statement
1) The C.O.G.S. is considered to be so significant
that the statement is prepared in 2 stages.
2) The first stage determines the gross profit.
profit is the difference between the selling
price and the cost price of the goods sold. It
can also been seen as the profit figure before
deducting expenses.
3) The C.O.G.S. is shown on the income
statement.
4) The expense section is now called OPERATING
EXPENSES.
 Questions:
• CASE 1 & 2 on Page 353 (On Word)
• Prepare an Income Statement in excel with the
following accounts (Mustang Market, For the year
ended Dec 31)
– PERIODIC: T-Shirt Sales $256 000, Sweatshirt Sales $320 000, Beginning
Inventory $45 000, Ending Inventory $32 000, Utilities Expense $1 365,
Wages Expense $32, 000 Purchases $300 400, Freight In $1 050,
Miscellaneous Expense $ 2 000, Purchase Returns $12 500, Delivery
Expense $3 200, Purchase Returns & Allowances $3 450, Sales Returns &
Allowances $2 500
– PERPETUAL: T-Shirt Sales $256 000, Sweatshirt Sales $320 000, Cost of
Goods Sold $430 000, Utilities Expense $1 365, Wages Expense $32, 000
Purchases $300 400, Freight In $1 050, Miscellaneous Expense $ 2 000,
Purchase Returns $12 500, Delivery Expense $3 200, Purchase Returns &
Allowances $3 450, Sales Returns & Allowances $2 500