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Case Study: Expanded Income Statement

Case Study: Expanded Income Statement

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Author: Sophia Tutorial
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Calculate the net sales for an expanded income statement.

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Tutorial
what's covered
This lesson will cover the preparation of an expanded income statement in the context of a case study, using a hypothetical merchandising company.

Our discussion breaks down as follows:

  1. Case Study: Legacy Clothing
  2. Case Study: Expanded Income Statement


1. Case Study: Legacy Clothing

The subject company for our case study is called Legacy Clothing. Legacy Clothing is a sole proprietorship, which is a company that is owned by a single individual, and where that individual and the business are legally treated as the same.

The purpose of Legacy Clothing as a business is to own and operate clothing/merchandise stores. It is similar to a department store chain, selling men's, women's, and children's clothing and other related items. Legacy Clothing has locations throughout Washington, DC, and they have a large staff of 50 people employed in their stores.

Legacy Clothing
Type of company Sole proprietorship
Business purpose Own and operate clothing/merchandise stores
Business location(s) Washington, D.C.
Staff of 50 people

The Legacy Clothing needs an expanded income statement in order to understand the business's profitability. An expanded income statement can help Legacy Clothing determine the health and strength of their business, which is important information for owners, potential investors, and the banks that they are dealing with.

An expanded income statement also helps Legacy Clothing to understand the specific needs for their merchandising business, by providing critical information such as net sales, net purchases, and cost of goods sold, so that they are able to perform an analysis on that information to fully understand their business.


2. Case Study: Expanded Income Statement

Now, let's look at preparing an expanded income statement for Legacy Clothing. The starting point for preparing our financial statements is the adjusted trial balance, shown on the left.

The first thing we need to do is put in our header, which includes our company name, Legacy Clothing, "Income statement," and "For the period ending December 31, 2012."

The next step is to input our gross sales. We pull that sales number information, as you can see below, from our adjusted trial balance. Then, we can pull in our sales returns and allowances, as well as our sales discounts, which also come from the adjusted trial balance. This total provides our net sales.

The next piece needed is to calculate our cost of goods sold. In order to do this, let's dive deeper into the cost of goods sold calculation.

To calculate cost of goods sold, we start with our beginning inventory from the beginning of the year. Then, we pull in our purchases from our adjusted trial balance. From purchases, we subtract our purchase returns and allowances, as well as subtract our purchase discounts--all information pulled from the adjusted trial balance--to give us our net purchases.

Now, we take those net purchases and add freight-in, which is the shipping costs to get those purchases to our business. This provides our cost of goods purchased.

Finally, we take our beginning inventory and add cost of goods purchased to give us our goods available for sale. Once we have this figure, we can subtract out our ending inventory to give us our cost of goods sold. We will take this cost of goods sold number and put it into our expanded income statement.

Returning to the income statement, now we can plug in our $228,000 cost of goods sold figure. Then, we take our net sales and subtract cost of goods sold to give us our gross profit.

Now we can detail the operating expenses, which, again, we pull from our adjusted trial balance. Therefore, we pull in our salaries expense, advertising expense, rent expense, depreciation expense, insurance, and supplies, which are all of our operating expenses. We subtract our operating expenses from our gross profit to give us income from operations.

However, we're 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, we take our income from operations, subtract out our interest expense, to give us our net income.

This is what the final expanded income statement looks like for our subject company, Legacy Clothing.


summary
Today we introduced our case study company called Legacy Clothing, that is in the business of owning and operating multiple department store locations, selling men's, women's, and children's clothing and other related items. We walked through an example of preparing an expanded income statement for Legacy Clothing, using our adjusted trial balance and calculating cost of goods sold to prepare the expanded income statement.

Source: Adapted from Sophia instructor Evan McLaughlin.