FINANCIAL STATEMENT PREPARATION
MERCHANDISING BUSINESS
Merchandising business – engaged in buying and selling of goods for profit.
Service – render services for a fee
Net income = revenue - expenses
Computation of Net Income:
Net sales= revenue 100 xx
Less: Cost of goods sold 50 xx
Gross profit 50 xx
Less: Operating expenses 25 xx
Net income from operation 25 xx
Merchandise inventory (end)= ASSET
Computation of Net Sales:
Sales (cash sales + credit sales) sales on account xx
Less: Sales discounts Xx 15
Sales returns & Xx 25 Xx 40
Net sales xx
Computation of Net Purchases:
Purchases xx
Add: Freight-in xx
Total xx
Less: Purchase discounts xx
Purchase returns & allowances xx xx
Net purchases xx
Freight – delivery or transportation expenses
Freight - in = added to purchases
Freight – out = selling expense
Computation of Cost of Goods Sold:
Merchandise inventory, beginning 0 xx
Add: Net purchases 500 xx
Total goods available for sale 500 xx
Less: Merchandise inventory, ending 150 xx
Cost of goods sold 350 xx
Computation of Gross Profit:
Net sales xx
Less: Cost of goods sold xx
Gross profit xx
Computation of Operating Expenses:
Selling expenses xx
General and administrative expenses xx
Total operating expenses xx
Selling expenses – expenses incurred for the sale of merchandise
Ex. Freight-out, advertising, commission, salaries- store (basta me store)
General and administrative expenses – expenses incurred in the office or administrative
concerns
Ex. Salaries – office, office supplies expense, insurance, rent – office , bad
debts/doubtful accounts (accounts receivables – not collected)
Exercise 1
At December 31, 2019, Angelo Company’s accounting records show the following accounts and
balances:
Merchandise inventory Jan 1 P 450,000
Purchases 1,500,000
Purchase discounts 36,000
Freight-in 24,000
Salaries and wages 750,000
Freight out 46,600
Sales discounts 55,500
Sales 3,650,000
Advertising expense 38,000
Depreciation expense 123,000
Sales returns and allowances 34,500
Rent expense 120,000
The company took a physical inventory count at December 31, 2019 and noted that P324,000 of
inventory is unsold on that date,
Required:
1. Determine the total goods available for sale during 2019.
2. Determine the cost of goods sold during 2019.
3. How much is the gross profit for 2019? Express the gross profit in terms of percentage of
sales.
4. How much is the company’s net income?
Answers:
Sales 3,650,000
Less: Sales discounts 55,500
Sales returns 34,500 90,000
Net sales 3,560,000
Beginning inventory 450,000
Purchases 1,500,000
Freight-in 24,000
Purchase returns (36,000)
Net purchases 1,488,000
TGAS 1,938,000
Less: Ending inventory 324,000
COGS 1,614,000
Gross profit 1,946,000
Less: Operating expenses
Salaries & wages 750,000
Freight-out S 46,600
Advertising S 38,000
Depreciation 123,000
Rent 120,000 1,077,600
Income from operation 868,400
ANSWERS:
1. TGAS 1,938,000
2. COGS 1,614,000
3. (1,946,000/3,560,00)* 1,946,000 *54.66%
3. Net income 868,400
Exercise 2
The selected accounts and their normal balances appear in the ledger of Phoenix Company for
the year ended December 31, of the current year:
Cash P 38,000
Notes receivable 50,000
Accounts receivable 62,000
Merchandise inventory, January 1 48,000
Office supplies 1,600
Prepaid insurance 6,800
Office equipment 54,000
Accumulated depreciation-Office equipment 10,800
Store equipment 107,500
Accumulated depreciation-Store equipment 48,900
Accounts payable 27,000
Salaries payable 1,700
Notes payable (due in 2 years) 30,000
Steve Nash, capital 194,010
Steve Nash, drawing 15,000
Sales 1,257,000
Sales returns & allowances 19,000
Sales discounts 8,500
Purchases 934,400
Purchases discounts 9,400
Purchases returns & allowances 18,200
Freight-in 15,500
Sales salaries expense 108,000
Advertising expense 28,300
Depreciation expense-Store equipment 4,600
Miscellaneous selling expense 1,000
Office salaries expense 50,900
Rent expense 22,150
Depreciation expense-Office equipment 8,700
Insurance expense 12,750
Office supplies expense 900
Miscellaneous administrative expense 1,150
Interest income 5,400
Interest expense 3,660
Required:
1. Prepare a multiple-step Statement of Comprehensive Income. Assume ending inventory
of P100,000.
2. Prepare a Statement of Changes in Equity.
3. Prepare a report form of Statement of Financial Position, assuming that the current
portion of the Notes Payable is P15,000.
Answers:
PHOENIX COMPANY
Statement of Comprehensive Income
For the year ended December 31, 2019
Sales 1,257,000
Less: Sales discounts 8,500
Sales returns 19,000 27,500
Net sales 1,229,500
Beginning inventory 48,000
Purchases 934,400
Freight-in 15,500
Purchase discounts (9,400)
Purchase returns (18,200)
Net purchases 922,300
TGAS 970,300
Less: Ending inventory 100,000
COGS 870,300
Gross profit 359,200
Add: Other operating income
Interest income 5,400
Total income/ revenue 364,600
Less: Operating expenses
Sales salaries SE 108,000
Office salaries GAE 50,900
Advertising SE 28,300
Depreciation -SEq SE 4,600
Depreciation -OEq GAE 8,700
Rent GAE 22,150
Insurance GAE 12,750
Office supplies GAE 900
Miscellaneous - selling SE 1,000
Miscellaneous - adm. GAE 1,150 238,450
Income from operation 126,150
Less: Financing cost
Interest expense 3,660
Net income before tax 122,490
PHOENIX COMPANY
Statement of Changes in Equity
For the year ended December 31, 2019
Steve Nash, capital, Jan 1 194,010
Add: Net income 122,490
Total 316,500
Less: Steve Nash, drawing 15,000
Steve Nash, capital, Dec 31 301,500
PHOENIX COMPANY
Statement of Financial Position
December 31, 2019
ASSETS
Current Assets:
Cash 38,000
Notes receivable 50,000
Accounts receivable 62,000
Merchandise inventory END 100,000
Office supplies 1,600
Prepaid insurance 6,800 258,400
Non-current Assets:
Office equipment 54,000
Less: Accumulated depreciation 10,800 43,200
Store equipment 107,500
Less: Accumulated depreciation 48,900 58,600 101,800
TOTAL ASSETS 360,200
LIABILITIES
Current Liabilities:
Notes payable - current 15,000
Accounts payable 27,000
Salaries payable 1,700 43,700
Non-current Liabilities:
Notes payable 15,000
Total Liabilities 58,700
EQUITY
Steve Nash, capital 301,500
TOTAL LIABILITIES & EQUITY 360,200
Exercise 3
The accounts of AFB Company selected from the December 31, 2019 year-end trial balance are
as follows:
Advertising expense P 150,000 S
Freight out 260,000 S
Depreciation expense-Office equipment 110,000 G
Depreciation expense-Store equipment 140,000 S
Doubtful accounts expense 20,000 G
Freight in 100,000
Gain on sale of equipment 45,000
Interest expense 35,000
Interest income 50,000
Merchandise inventory – 1/1 1,160,000
Merchandise inventory – 12/31 1,040,000
Miscellaneous selling expenses 90,000 S
Office supplies expense 430,000 G
Purchases 6,710,000
Purchases returns and allowances 250,000
Purchases discounts 180,000
Rent expense (40% Store) 70,000 S 40%/ G 60%
Salaries and wages- Selling 960,000 S
Salaries and wages- administrative 1,130,000 G
Sales 9,810,000
Sales returns and allowances 260,000
Sales discounts 140,000
Selling supplies expense 70,000 S
Required:
Prepare a formal Statement of Comprehensive Income for AFB Company for the year ended
December 31, 2019, using
a. Function of expense method
b. Nature of expense method
A. Function of Expense Method
AFB COMPANY
Statement of Comprehensive Income
For the year ended December 31, 2019
Sales 9,810,000
Less: Sales discounts 140,000
Sales returns 260,000 400,000
Net sales 9,410,000
Beginning inventory 1,160,000
Purchases 6,710,000
Freight-in 100,000
Purchase discounts (180,000)
Purchase returns (250,000)
Net purchases 6,380,000
TGAS 7,540,000
Less: Ending inventory 1,040,000
COGS 6,500,000
Gross profit (PURELY SALE OF MDSE) 2,910,000
Add: Other operating income
Gain on sale of equipment 45,000
Interest income 50,000 95,000
Total income 3,005,000
Less: Operating expenses
Selling:
Salaries & wages 960,000
Freight out 260,000
Selling supplies 70,000
Rent (40%) 28,000
Advertising 150,000
Depreciation -SEq 140,000
Miscellaneous 90,000 1,698,000
General & Administrative:
Salaries & wages 1,130,000
Depreciation -OEq 110,000
Rent (60%) 42,000
Doubtful accounts 20,000
Office supplies 430,000 1,732,000 3,430,000
Income (Loss) from operation (425,000)
Less: Financing cost
Interest expense 35,000
Net income (loss) before tax (460,000)
B. Nature of Expense Method
AFB COMPANY
Statement of Comprehensive Income
For the year ended December 31, 2019
Sales 9,810,000
Less: Sales discounts 140,000
Sales returns 260,000 400,000
Sales Revenue 9,410,000
Add: Other operating income
Gain on sale of equipment 45,000
Interest income 50,000
Total revenue 9,505,000
Less: Operating expenses
Net purchases 6,380,000
Decrease in inventories 120,000
Salaries expense 2,090,000
Depreciation expense 250,000
Supplies expense 500,000
Other operating expense 590,000 9,930,000
Profit before interest and tax (425,000)
Less: Financing cost
Interest expense 35,000
Net income (loss) before tax (460,000)
