Source: Instrumental “Drops of H2O ( The Filtered Water Treatment )" by J.Lang (feat. Airtone),” Creative Commons, http://ccmixter.org/files/djlang59/37792
Hey, everyone, and welcome to our video today. A case study on the expanded income statement. So what's today's video about? Well, we're going to be looking at a subject company called Legacy Clothing, and we're going to discuss our company, a merchandising company, and the expanded income statement. And then we're going to do an example of preparing an expanded income statement for our case study or our subject company. So let's learn a little bit about this company. It's called Legacy Clothing. And what type of company is it? Well, it's a sole proprietorship. So it's a company that is owned by a single individual and where the individual and the business are legally treated as the same. So what does our business do. Well, Legacy Clothing owns and operates clothing or merchandise stores or you can even consider it a department store. So it sells men's, women's, and children's clothing and other related items. Where are our business locations? Well, they have locations throughout Washington, DC, and they have a large staff of 50 people to work in their stores.
So let's review. For Legacy Clothing, does our company need an expanded income statement. Do we need to prepare an expanded income statement for Legacy Clothing? Yes. Yes we do. Well, why do we need to do that? Well, we need to be able to understand the business profitability. How is our business doing? What's the health and strength of our business? That's important information for us is owners, potential investors we might have, as well as banks that we're dealing with. And it helps us understand specific needs for our merchandising business. We need to know our net sales, net purchases, cost of goods sold, and then we need to be able to perform an analysis on that information so that we can really understand our business.
So now let's look at preparing an expanded income statement for our subject company, Legacy Reality. So let's go ahead and walk through that now. OK, so what we're going to be doing here is preparing our expanded income statement for Legacy Clothing. Now, what's the starting point for preparing our financial statements. It's going to be our adjusted trial balance. So let's start preparing our expanded income statement. The first thing we need to do is put in our header. So we need to put in our company name and income statement for the period ending December 31, 2012. So that's our heading. That's important information. The next thing we need to do is put in our gross sales. So we pull that information, as you can see here, our sales number, from our adjusted trial balance. Then we can pull in our sales returns and allowances and our sales discounts, which also come from our adjusted trial balance. Now that total gives us our net sales.
Now, the next piece that we need to do is calculating our cost of goods sold. So in order to do that, let's dive in a little bit deeper into looking at the cost of goods sold calculation. OK, so now we're going to be looking at performing our cost of goods sold calculation before we go back into our income statement. So we still need some information from our adjusted trial balance, but let's start preparing this cost of goods sold calculation. So cost of goods sold, we start with our beginning inventory from the beginning of the year. And then we pull in our purchases, and we can find those on our adjusted trial balance. To our purchases, we would subtract our purchase returns and allowances and we would also subtract our purchase discounts to give us our net purchases. And now we take those net purchases, and we add freight in. So the shipping costs to get those purchases to our business. And that's our cost of goods purchased. So we take our beginning inventory, and we add cost of goods purchased to give us our goods available for sale. Now once we have that, what we can do is we can subtract out our ending inventory to give us our cost of goods sold. And we'll take this cost of goods sold number and put that into our expanded income statement.
So let's go back to the income statement. Perfect. So now we have our cost of goods sold figure, which we can plug-in there-- that 228,000. So then we take our net sales, subtract cost of goods sold, to give us our gross profit. And now we can detail the operating expenses, which we will pull again from our adjusted trial balance. So we'll pull in our salaries expense, advertising expense, rent expense, depreciation expense, insurance, and supplies. So those are all of our operating expenses. We subtract our operating expenses from our gross profit to give us income from operations. Were not quite done yet. Now we need to plug-in any other revenue or expense items that we might have. In this case, all we have is our interest expense. So now we take our income from operations, subtract out our interest expense, to give us our net income. So this is what the expanded income statement looks like for our subject company, Legacy Clothing. Great, so now we've prepared an expanded income statement for our subject company, Legacy Clothing. So now let's summarize what we talked about today.
In a nutshell, we discussed our case study company, Legacy Clothing, and then we looked at an example of preparing an expanded income statement for this company. We looked at using our adjusted trial balance, we looked at calculating cost of goods sold, and preparing our expanded income statement. I hope everybody enjoyed this video, and I hope to see you next time.