Merchandising Operations and the Accounting Cycle - Pearson
Merchandising Operations and the Accounting Cycle - Pearson
Merchandising Operations and the Accounting Cycle - Pearson
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EXHIBIT 5-1<br />
A Merch<strong>and</strong>iser’s Income<br />
Statement Contrasted with<br />
<strong>the</strong> Income Statement of a<br />
Service Business<br />
Net sales revenue minus cost of goods sold is called gross margin or gross profit.<br />
Net sales revenue – Cost of goods sold = Gross margin<br />
(sometimes abbreviated (same as Cost of sales) (same as Gross profit)<br />
as Sales)<br />
or, more simply,<br />
224 Part One The Basic Structure of <strong>Accounting</strong><br />
THE FORZANI GROUP LTD.<br />
Consolidated Statements of Income (adapted)<br />
For <strong>the</strong> Years Ended January 30, 2000, <strong>and</strong> January 31, 1999<br />
(In thous<strong>and</strong>s of dollars)<br />
2000 1999<br />
Revenue<br />
Corporate $325,041 $275,293<br />
Franchise 129,060 103,355<br />
454,101 378,648<br />
Cost of sales 310,816 253,679<br />
Gross margin 143,285 124,969<br />
Operating <strong>and</strong> administrative expenses<br />
Store operating 84,828 76,826<br />
General <strong>and</strong> administrative 33,008 29,358<br />
117,836 106,184<br />
Operating income before undernoted items 25,449 18,785<br />
Amortization 8,564 6,514<br />
Interest 2,542 4,147<br />
11,106 10,661<br />
Net earnings $ 14,343 $ 8,124<br />
AIR & SEA TRAVEL, INC.<br />
Income Statement<br />
For <strong>the</strong> Year Ended December 31, 2003<br />
Service revenue $113,000<br />
Expenses (listed individually) 42,000<br />
Net earnings $ 71,000<br />
Sales – Cost of sales = Gross profit<br />
Gross margin is a measure of business success. A sufficiently high gross margin<br />
is vital to a merch<strong>and</strong>iser, since all o<strong>the</strong>r expenses of <strong>the</strong> company are deducted<br />
from this gross margin. FGL’s operations were more successful during <strong>the</strong> year<br />
ended January 30, 2000 because net income increased.<br />
The following example will clarify <strong>the</strong> nature of gross margin. Suppose<br />
SportChek’s cost for a certain piece of hockey equipment is $50 <strong>and</strong> SportChek sells<br />
<strong>the</strong> equipment to a customer in Halifax for $90. SportChek’s gross margin on <strong>the</strong><br />
equipment is $40 ($90 – $50). The gross margin reported on FGL’s income statement,<br />
$143,285,000, is <strong>the</strong> sum of <strong>the</strong> gross margins on all <strong>the</strong> products <strong>the</strong> company<br />
sold during its 2000 fiscal year.<br />
What Goes into Inventory Cost?<br />
The $113,827,000 cost of inventory on The Forzani Group Ltd.’s (FGL) balance sheet<br />
represents all <strong>the</strong> costs FGL incurred to bring <strong>the</strong> merch<strong>and</strong>ise to <strong>the</strong> point of sale.