Preparing a retail income statement
The income statement for a merchandising business is presented using the “multiple-step” format. There are four steps to completing an income statement.
Step 1: Compute the net sales:
| Net Sales | = | Sales – (Sales Discounts + Sales Returns and Allowances) |
|---|---|---|
| = | $106,600 – ($4,200 + $4,000) | |
| = | $98,400. |
Step 2: Compute the gross profit.
Gross Profit is the total profit from sales before considering operating expenses. Cost of goods sold (COGS) is an expense that represents the cost of all merchandise sold during the current accounting cycle. Cost of goods sold is subtracted from net sales to compute gross profit:
| Gross Profit | = | Net Sales – Cost of Goods Sold |
|---|---|---|
| = | $98,400 – $52,700 | |
| = | $45,700. |
Step 3: Compute the total operating expenses.
Total operating expenses are expenses incurred during the accounting cycle to support the selling of inventory (selling expenses) and the operations of the company as a whole (general and administrative expenses). Compute total operating expenses:
| Total Operating Expenses | = | Selling Expenses | + | General and Administrative Expenses |
|---|---|---|---|---|
| = | $9,000 + $8,400 | |||
| = | $17,400. | |||
Step 4: Compute Net Income:
| Net Income | = | Gross Profit – Total Operating Expenses |
|---|---|---|
| = | $45,700 – $17,400 | |
| = | $28,300. |
Thus, the answer is:
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