Question

Describe and illustrate the financial statements of a merchandising business

Answer 1

Financial statements of merchandising business

Balance sheet

Some of the differences between balance sheet of merchandising business and other business are -

1) the balance sheet contains inventory which includes merchandise inventory and also estimated returns inventory. Now the merchandise inventory is that merchandise which is purchase to sell to customer.

2) on the liability side it includes a new liability named as customer refunds payable which includes amount payable to customer as a result it of any damage or return.

Some of the differences between income statement of merchandising business and other business -

Merchandising business provides more information to the people by giving a multiple step income statement as compared to other business which gives single step income statement.

In multiple step income statement there are many sections, subsections and subtotals. The first step in multiple step income statement is to compute the gross profit buy recording cost of merchandise sold against sale.

The second step is to compute operating income which is arrived by subtracting operating expense from the gross profit arrived in first step.

The final step used to compute net income by adjusting revenues or expenses that are indirectly related to business day to day operation . In other words any extraordinary revenue or extraordinary expenses.