Chapter 5

Merchandising Operations and Multiple-Step Income Statement

Learning Objective 1 - Describe Merchandising Operations and Inventory Systems
1) What is a Merchandise Business?
a) Target, Walmart, Amazon, Office Depot, etc.
b) Buy and Sell Goods
c) The primary source of revenues is referred to as sales revenue or sales
2) Measuring Income for a Merchandising Company
a) 2 new accounts
i) Cost of Goods Sold
ii) Gross Profit

iii) Gross Profit = Sales Revenue - Cost of Goods Sold

3) Flow of Costs and Systems

a) Companies use either a perpetual inventory system or a periodic inventory system to

account for inventory
i) Periodic Inventory System
(1) A company that
(a) Does not keep detailed records of goods on hand
(b) Determines cost of goods sold determined by a count
(c) Calculates its cost of goods sold as
 ii) Perpetual Inventory System
(1) A company that
(a) Maintains detailed records of the cost of each inventory purchase
and sale
(b) Maintains inventory records such that inventory that should be
on hand is continuously updated
(c) Determines cost of goods sold each time a sale occurs
(i) Advantages of the Perpetual System
1. Traditionally used for merchandise with high
unit values
2. Shows quantity and cost of inventory that should
be on hand at any time
3. Provides better control over inventories than a
periodic system
Learning Objective 4 - Prepare a Multiple-Step Income Statement and a Comprehensive Income
Statement
1) Single Step Income Statement
a) Subtract total expenses from total revenues
b) All data classified into two categories
i) Revenues
ii) Expenses
c) Two reasons for using single-step format:
i) Company does not realize any profit or income until total revenues exceed total
expenses
ii) Form is simple and easy to read

2) Nature of the Multiple-Step Income Statement

a) Highlight of net income
b) Three important line item
i) Gross profit
ii) Income from operations
iii) Net income
* If a list of expenses is given and Interest Expense is listed, what is the total amount of operating
expenses? (DO NOT INCLUDE INTEREST EXPENSE!!! It is NOT included under Operating
Expenses)
3) Non operating activities
a) Revenues and expenses and gains and losses unrelated to the company's main line of
operations. Examples include:
i) Other Revenues and Gains
(1) Interest revenue from notes receivable and marketable securities
(2) Dividend revenue from investments in capital stock
(3) Rent revenue from subleasing a portion of the store
(4) Gain from the sales of property, plant, and equipment
ii) Other Expenses and Losses
(1) Interest expense on notes and loans payable
(2) Casualty losses from such causes as vandalism and accidents
(3) Loss from sales of property, plant, and equipment
(4) Loss from strikes by employees and suppliers