lecture (4)

Dr. Mohiy Samy El-Shabasy, Associate Professor, Helwan University.

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Financial Statements for a Merchandising Firm

The main Financial Statements for a Merchandising Firms are:
1- Income statement.
2- Statement of The Balance sheet (The financial position).

Firstly: Income statement:

The income Statement.
Net Sales revenue $XXX
(-) Cost of goods sold ($X)
= Gross margin/profit $XX
(-) Operating expenses ($X)
Income from operations
+ Other revenues (not related to the activity). $XX
For Ex. Securities revenues
(-) Other expenses (not related to the activity) ($X)
For Ex. Interest expense
= Net income (profit) $XX

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 The complete Income Statement
For the year ended, December 31, 2024
Sales Revenue xx

(-) Sales Returns and Allowances xx

(-) Sales Discounts xx

Net Sales Revenue xx

Cost of Goods Sold:

Beginning Inventory xx

+ Cost of good purchased

Purchases xx

(-) Purchase returns and allowances xx

(-) Purchase discounts xx

= Net Purchase xx

+ Transportation-in or Fright in xx

= Cost of good purchased xx

= Cost of Goods Available for sale xx

(-) Ending Inventory (xx)

= Cost of Goods Sold. (-) (xx)

= Gross Profit on Sales xx

(-) Operating Expenses

Selling (marketing) expenses:
Sales salaries xx

Advertising xx

Delivery services xx

Depreciation xx

Total selling expenses xx

General and administration expense:

Office salaries xx

Utilities xx

Depreciation xx

Total General and Administration expense xx

= Total operating expenses (-) (xx)

= Income from operations xx

(-) Interest expense (xx)

= Net income $xxx

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 Secondly: Statement of The Balance sheet (The financial position).
The Balance sheet.
on December 31, 2024

Assets Liabilities, and owner’s equity

Current assets: Liabilities
Cash xx Current liabilities
Accounts receivable xx Accounts payable xx

Ending Inventory xx Total Current liabilities xx

Total current assets xx Long-Term liabilities

Property, plant, and equipment Loan xx

Land xx Total Long-Term liabilities xx

Equipment xx Total liabilities xx

Cars xx Owner’s equity xx

Building xx Capital xx

(-) Accumulated depreciation. xx + Net income xx

Total property, plant, and xx (-) Drawing xx

equipment
Total Owner’s equity xx

Total assets xx Total liabilities and owner’s equity

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 OR
The Financial position Statement.
on December 31, 2024

Assets:
Current assets:
Cash xx

Accounts receivable xx

Ending Inventory xx

Total current assets xx

Property, plant, and equipment

Land xx

equipment xx

Cars xx

Building xx

(-) Accumulated depreciation. xx

Total property, plant, and equipment xx

Total assets xx

Liabilities, and owner’s equity

Liabilities
Current liabilities
Accounts payable xx

Total Current liabilities xx

Long-Term liabilities
Loan xx

Total Long-Term liabilities xx

Total liabilities xx

Owner’s equity
Capital xx

+ Net income xx

(-) Drawing xx

Total Owner’s equity xx

Total liabilities and owner’s equity xx

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Example (1-17):
The following is the Trial Balance for Z Company Before the Adjusting
Entries:
Z Company
The Trial Balance
On December 31, 2023

Account titles Debit Credit

Cash $12,000
Accounts receivable 5,000
Inventory, Jan.1 10,000
Land 20,000
Building 50,000
Accumulated depreciation $5,000
Accounts payable 4,000
Z capital 78,000
Z drawing 2,000
Sales 140,000
sales returns and allowances 3,000
Sales discounts 2,000
Purchases 8,000
Purchase returns $5,000
Purchase discounts 3,000
Transportation-In $4,000
Sales salaries 15,000
Advertising expense 3,000
Office salaries 20,000
Utilities expense 5,000
Interest expense 4,000
Total $235,000 $235,000

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Additional information:
1. Inventory on hand on December 31, 2023, is $15,000.
2. Depreciation rate for the building is 5% annually.
Required:
a. Prepare the income statement for the year.
b. Prepare a balance sheet at the end of the year.

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 Solution
Z Company
The complete Income Statement
For the year ended, December 31, 2023
Sales Revenues $140,000
(-) Sales Returns and Allowances
$3000
(-) Sales Discounts (5,000)
2000
Net Sales 135,000
Cost of Goods Sold:
Inventory 1.1.2023 (Beginning) 10,000
+ Cost of good purchased
Purchases $80,000
(-) Purchase returns $5000
(-) Purchase discounts 3000 ($8000)
= Net Purchase 72,000
+ Transportation-in or Fright in 4,000
= Cost of good purchased 76,000
= Cost of Goods Available for sale 86,000
(-) Inventory 31.12.2023 (Ending) (15,000)
= Cost of Goods Sold. (-) (71,000)
= Gross Profit on Sales 64,000
(-) Operating Expenses
Selling expenses:
Sales salaries 15,000
Advertising 3,000
Total selling expenses 18,000
General and administration expense:
Office salaries 20,000
Utilities expense 5,000
Depreciation expense 2,500

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 Total General and Administration 27,500
expense
= Total operating expenses (-) (45,500)
= Income from operations 18,500
(-) Interest expense (4,000)
= Net income $14,500

Depreciation expense = Building × Depreciation ratio

= $ 50,000 × 5% = $ 2500.

Z Company
The Balance sheet.
on December 31, 2023

Assets Liabilities, and owner’s equity

Current assets: Liabilities
Cash $12000 Current liabilities
Accounts receivable 5,000 Accounts payable $4,000
Ending Inventory 15,000
Total current assets $32000 Total liabilities $4,000
Property, plant, and equipment Owner’s equity
Land 20,000 Z Capital $78,000
Building $50,000 + Net income 14,500
(-) Accumulated depreciation. (-) Drawing (2,000)
($7,500) 42,500
Total property, plant, and 62500 Total Owner’s equity 90,500
equipment
Total assets $94,500 Total liabilities and $94,500
owner’s equity
Accumulated depreciation = $5000 + $2500 = $7500.

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 Z Company
The Financial position Statement.
on December 31, 2023

Assets:
Current assets:
Cash $12000
Accounts receivable 5,000
Ending Inventory 15,000
Total current assets $32000
Property, plant, and equipment
Land 20,000
Building $50,000
(-) Accumulated depreciation. ($7,500)
Net Building 42,500
Total property, plant, and equipment 62500
Total assets $94,500
Liabilities, and owner’s equity
Liabilities
Current liabilities
Accounts payable $4,000
Total liabilities $4,000
Owner’s equity
Z Capital $78,000
+ Net income 14,500
(-) Drawing (2,000)
Total Owner’s equity 90,500
Total liabilities and owner’s equity $94,500