Video Transcript: Classified Income Statement

Hello and welcome back now we're going to discuss the classified income  statement. An unclassified income statement has only two categories, revenues  and expenses. In contrast, a classified Income Statement divides both revenues and expenses into operating and non operating items. The statement also  separates operating expenses into selling and administrative expenses. A  classified income statement is also called a multiple step income statement. We  present a classified income statement for Hanlon retail food store. This  statement uses the previously presented data on sales and cost of goods sold,  together with additional assumed data on operating expenses and other  expenses and revenues. Note that a classified income statement has the  following four major sections, operating revenues, cost of goods sold, operating  expenses and non operating revenues and expenses, which is other revenues  and other expenses. The Classified income statement shows important  relationships that help in analyzing how well the company is performing. For  example, by deducting cost of goods sold from operating revenues, you can  determine by what amount sales revenues exceed the cost of items being sold.  If this margin, called gross margin, is lower than desired, a company may need  to increase its selling price and or decrease the cost of goods sold. The  Classified Income Statement subdivides operating expenses into selling and  administrative expenses. Thus statement users can see how much expenses  incurred in selling the product and how much in administrating the business  statement. Users can also make comparisons with other years data for the  same business and with other businesses. Non operating revenues and  expenses appear at the bottom of the income statement because they are less  significant in assessing the profitability of the company. So, for instance, we  have an income statement, so you can see your operating rather operating  revenues. And under that, you have your gross sales of the 22,280 $2,000 you  have your discounts and your sales, return allowance for a net sales of 262,000  and then the cost of goods sold is the cost to produce or sell your main items,  okay, your merchandise, so you have your net sales and whatever. So you're  going to your cost of goods sold is your merchandise inventory that you start  with any purchases added to that, less any purchase discounts, any purchase  returns and allowances for a net purchase price of $156,000 And then you're  going to add in any transportation costs, any kind of cost that's going to get you  prepared to sell that item, and then you will have a final cost of goods available  for sale, which is $190,000 less any merchandise already sold. And for a final  cost of goods sold of $159,000 and then you take that amount and deduct it  from your net sales for a, excuse me, for a gross margin of $103,000 from there, you're going to break down your expenses into operating expenses, which  would include selling expenses, salaries, self, percent, travel, delivery, anything  that's going to help you operate the Business. And then you will have your other  administrative expenses and for total operating expenses. And then you will 

have your income from operations, the non operating revenues and expenses.  So like your interest revenue, interest expense, those are less significant. And  finally, you will either have a net income or a net loss. Operating revenues are  

the revenues generated by the major activities of the business, usually the sale  of products or services or both. Cost of goods sold is the major expense. And  merchandising companies note the cost of goods sold section of what we just of  the income statement that I just showed you. This chapter has already  discussed the items used in calculating cost of goods sold. Merchandisers  usually highlight the amount by which sales revenues exceed the cost of goods  sold in the top part of the income statement, the excess of net sales over cost of goods sold is the gross margin, or gross profit. To express gross margin as a  percentage rate, we divide gross margin by net sales in Exhibit 39 the gross  margin rate is approximately 39.3% which would be the $103,000 divided by the $262,000 the gross margin rate indicates that out of each sales dollar,  approximately 39 cents is available to cover To cover other expenses and  produce income. Then business owners watch the gross margin rate closely,  since a small percentage fluctuation can cause a large dollar change in net  income, also a downward trend in the gross margin rate may indicate a problem  such as theft of merchandise. For instance, one southeastern sporting goods  company sports town suffered significant gross margin deterioration from  increased shoplifting and employee theft. Operating expenses for a  merchandising company are those expenses other than Cost of Goods Sold  incurred in the normal business functions of a company. Usually operating  expenses are either selling expenses or administrative expenses. Selling  expenses are expenses a company incurs in selling and marketing efforts.  Examples include salaries and commissions of salespersons, expenses for  salespersons, travel, delivery, advertising, rent, utilities on the building, sales,  supplies used depreciation on delivery trucks that's used in the sales.  Administrative expenses are expenses a company incurs in the overall  management of a business. Some examples include the administrative salary,  the rent and utilities on an administrative building, insurance expense, the  supplies used in depreciation on office equipment, certain operating expenses  may be shared by the selling and administrative functions. For example, a  company might incur rent, taxes and insurance on a building for both sales and  administrative purposes, expenses covering both the selling and administrative  functions must be analyzed and prorated between the two functions on the  income statement. For instance, if $1,000 of depreciation expense relates 60%  to selling and 40% to administration based on their square footage or number of  employees, the income statement would show $600 as a selling expense and  400 as an administrative expense. Non operating revenues and non operating  expenses are revenues and expenses not related to the sale of products or  services regularly offered for set for sale by a business. An example of a non 

operating revenue is interest that a business earns on most receivable. An  example of non operating expense is an interest incurred a money borrowed by  the company. To summarize the more important relationships in the income  statement of merchandising of a merchandising firm, we can use the following  equations then to arrive at net sales. It's simply your gross sales minus the sales discount and sales returns and allowances for your net purchases. It would be  the purchases minus any purchase discounts and the purchases returns and  allowances to arrive at your net cost of purchases, it's your net purchases plus  any transportation in and then to arrive at your cost of goods sold, it will be your  beginning inventory, plus any net cost of purchases, minus your engine or your  ending inventory, your gross margin. You arrive at that by your net sales, minus  your cost of goods sold, and then income from operations equals your gross  margin minus your operating expenses, which is you're selling in administration  expenses, and to arrive finally to net income is income from operations plus non  operating revenues minus non operating expenses. Each of these relationships  is important because of the way it relates. To an overall measure of the business profitability. For example, a company may produce a high gross margin on  sales. However, because of large sales commissions and delivery expenses, the owner may realize only a very small percentage of the gross margin as a profit.  The classification in the income statement allow a user to focus on the whole  picture, as well as on how net income was derived.