Page 257 - Accounting Principles (A Business Perspective)

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• Expansion and application of the relationship introduced in Learning objective 2. Beginning inventory +
Net cost of purchases = Cost of goods available for sale. Cost of goods available for sale - Ending inventory =
Cost of goods sold.

• A classified income statement has four major sections—operating revenues, cost of goods sold, operating
expenses, and nonoperating revenues and expenses.
• Operating revenues are the revenues generated by the major activities of the business—usually the sale of
products or services or both.
• Cost of goods sold is the major expense in merchandising companies.
• Operating expenses for a merchandising company are those expenses other than cost of goods sold incurred

in the normal business functions of a company. Usually, operating expenses are classified as either selling
expenses or administrative expenses.
• Nonoperating revenues and expenses are revenues and expenses not related to the sale of products or
services regularly offered for sale by a business.
Gross margin
• Gross margin percentage=
Netsales
• The gross margin rate indicates the amount of sales dollars available to cover expenses and produce
income.
• Except for the merchandise-related accounts, the work sheet for a merchandising company is the same as
for a service company.
• Any revenue accounts and contra purchases accounts in the Adjusted Trial Balance credit column of the
work sheet are carried to the Income Statement credit column.
• Beginning inventory, contra revenue accounts. Purchases, Transportation-In, and expense accounts in the
Adjusted Trial Balance debit column are carried to the Income Statement debit column.

• Ending merchandise inventory is entered in the Income Statement credit column and in the Balance Sheet
debit column.
• Closing entries may be prepared directly from the work sheet. The first journal entry debits all items
appearing in the Income Statement credit column and credits Income Summary. The second entry credits all
items appearing in the Income Statement debit column and debits Income Summary. The third entry debits
Income Summary and credits the Retained Earnings account (assuming positive net income). The fourth entry

debits the Retained Earnings account and credits the Dividends account.
Appendix: The work sheet for a merchandising company
Exhibit 40 shows a work sheet for a merchandising company. Lyons Company is a small sporting goods firm.
The illustration for Lyons Company focuses on merchandise-related accounts. Thus, we do not show the fixed

assets (land, building, and equipment). Except for the merchandise-related accounts, the work sheet for a
merchandising company is the same as for a service company. Recall that use of a work sheet assists in the
preparation of the adjusting and closing entries. The work sheet also contains all the information needed for the
preparation of the financial statements.
To further simplify this illustration, assume Lyons needs no adjusting entries at month-end. The trial balance is
from the ledger accounts at 2010 December 31. The USD 7,000 merchandise inventory in the trial balance is the

Accounting Principles: A Business Perspective 258 A Global Text