In 2007, Clyde Blackstock opened Clyde’s Pets, a small retail shop selling pet supplies. On December 31, 2007 Clyde’s accounting records showed the following:
Merchandise inventory at December 31, 2007 $10,250
Merchandise inventory at January 1, 2007 $15,000
Sales revenue for year $54,000
Utilities for shop $3,000
Rent for shop $3,000
Sales commissions $2,250
Purchases of merchandise $27,000
Q. 1. Part 1. Prepare an income statement for Clyde’s Pets, a merchandiser, for the year ended December 31, 2007. You may use the template below. Hint: You will need to calculate Cost of Goods Sold (COGS).
To prepare an income statement for Clyde's Pets, we need to calculate the Cost of Goods Sold (COGS). COGS represents the cost incurred by Clyde's Pets to acquire the inventory that was sold during the year.
To calculate COGS, we need to use the formula:
COGS = Opening Inventory + Purchases - Closing Inventory
Given information:
Opening inventory (January 1, 2007) = $15,000
Closing inventory (December 31, 2007) = $10,250
Purchases of merchandise = $27,000
Now, let's calculate COGS:
COGS = $15,000 + $27,000 - $10,250
COGS = $31,750
Once we have the COGS, we can prepare the income statement for Clyde's Pets. The income statement presents the revenues, expenses, and the resulting net income.
Here is the income statement template:
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Clyde's Pets Income Statement
For the Year Ended December 31, 2007
Sales Revenue: $54,000
Cost of Goods Sold: -$31,750
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Gross Profit: $22,250
Expenses:
Utilities for shop: -$3,000
Rent for shop: -$3,000
Sales Commissions: -$2,250
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Total Expenses: -$8,250
Net Income: $14,000
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In this income statement, we subtract the COGS from the Sales Revenue to calculate Gross Profit. Then, we deduct all the expenses (utilities, rent, and sales commissions) from the Gross Profit, resulting in the Net Income of $14,000.
Note that the negative signs (-) indicate expenses, and positive signs (+) indicate revenues or profits in the income statement.