An income statement shows the profit or loss a company earns from business activities in a given period. The income statement of a merchandising company is often an important financial statement for these business types. The best tips for merchandising companies needing to prepare an income statement include the use of a multistep format, selection of a consistent inventory valuation method, and creation of trends with each month’s statement. An accountant or other individual knowledgeable in the creation of this statement should prepare it. The income statement may be quite complex, depending on the items sold by the business.
The multistep income statement has three sections: gross profit, operating expenses, and income, nonstandard items, and net profit. In most cases, the most important sections for an income statement of a merchandising company are the first two. The cost of goods sold in the gross profits sections is fairly sizable for most merchandising companies, along with the operating expenses in the second section. When a merchandising company desires to lower business costs, these two sections are usually the first to go under review. Some companies may not have any significant nonoperating items that fall into the third section.
Inventory valuation methods are among the most important accounting concepts for a merchandising company. This concept determines which goods currently in inventory move first to the cost of goods sold (COGS) section for the income statement of a merchandising company. First in, first out methods state that goods purchased first by the company go to COGS first. Last in, first out inventory valuation is the opposite, where the goods purchased last move to the COGS account first. Weighted average inventory valuation computes a new average per-unit cost for inventory items prior to moving the costs to the income statement once sold.
Merchandising companies can usually select whichever inventory valuation method works best for their operations. A financial disclosure is necessary to inform stakeholders about which method is in current use. Switching inventory valuation methods frequently is usually not common with merchandising companies.
In most cases, merchandising companies desire trends for each line item on the income statement. Therefore, the income statement of a merchandising company may have percentages next to each line item that indicate an increase or decrease for the current month. The trends on the income statement can help a merchandising company determine the current strength of its operations.