 Hello, in this presentation, we'll be taking a look at merchandising financial statements. We will be able to describe financial statements for a merchandising company, explain the differences and the similarities between financial statements for a merchandising company versus financial statements for a service company, and explain the relationship between the balance sheet income statement and statements of equity. So much of this stuff will be the same in that we have seen a service company. We've looked at the financial statements and the relationship between the financial statements in terms of a service company. Many of the concepts will be the same. We're going to make the financial statement from the adjusted trial balance. The financial statements will have a balancing concept. We will be able to see the accounting equation within the balance sheet and we will be able to relate the balance sheet to the income statement to the equity section or the equity statement in very similar ways. We want to refresh ourselves and be able to understand those concepts. And then on top of that, we're going to take a look at what will be different from a service company, which does not sell merchandise, to a company which does, and of course those differences will focus around the sale of merchandise. So the sale of merchandise will be a very substantial part of the reporting clearly to a merchandising company. Just remember that everything else will be similar. So it's very important to look at the prior stuff as we move forward as well. We will not be emphasizing it as much because we're going to build on the new material, but you always want to go back and refresh the concepts as we go. And this will be a good exercise to refresh some of those concepts. I'm going to start off with the balance sheet instead of the income statement because the balance sheet is the double entry accounting system. So clearly we will have pieces of the income statement building into the balance sheet. But I want to start off with the balance sheet because that shows you the accounting equation, that accounting equation being assets equal liabilities plus equity. So the accounting statement, the balance sheet is the entire accounting equation. It is the balancing statement. It is the accounting equation. It is the double entry accounting system. And so you want to be able to see that conceptually as of a point in time. Now remember that the balance sheet only has one date. It has a point in time, in this case December 31st. That means that there's no beginning and no end. It is as of now. So remember that similar to you watching this video, as of now you're watching this video. Nothing can change that. It is what it is. If you want to know why you're here or how you got here, you can go to the prior day that you started the day. How did you wake up? What did you do? And then you ended up watching this video, whatever. But as of this point in time, you are at this point in time. That's the same with the balance sheet. The equity section is where we stand as of this point in time. As of this point in time, there's a book value of $267,250. Can't change it is what it is as of this point in time. What we can do is tell you the story of how we got here, basically going back a month or going back a year or going back multiple years in terms of what is the story that got us to this point in time. Now when we look at the balance sheet, we're going to take it from the adjusted trial balance. Remember we got the people entering the data in the accounting department. We're compiling the data. Then we go through the adjusting process. We make the adjusted trial balance. Then we make the financial statements, which we're doing now, from the adjusted trial balance. And then we're going to do the closing process. That's the same cycle that we're going to have no matter what type of accounting, what type of business we're in within the normal accounting cycle. If we look at the trial balance, remember how these trial balances are formatted. We are representing the debits in green. They generally have debit balances. I'm sorry, we're representing the assets in green. They generally have debit balances with the exception of a contra asset here, which has a credit balance. That's going to be an asset type account with a credit balance represented with brackets. So the brackets represent credits, Excel sees them as negative numbers. We are representing the credits here in terms of bracketed numbers. The accounts payable is going to be a liability type account. Liabilities represented with the yellow or orange color. And then we have all blue down here, but we got two different shades of blue. We've got the capital and the draws being this lighter blue. Those are going to be part of the equity statement or the equity section and or the equity section versus the darker blue, which is part of the income statement. So remember that capital account has a credit balance draws is kind of like a contra capital account means the money that was drawn out from the owner and it has a debit balance because it's going to bring the total capital down. Sales has a credit balance and it's represented by the brackets. And then we have two kind of new accounts in terms of the statement for merchandising companies being the sales returns and allowance and the sales discount. And of course, they're new because they have to do with the inventory. Also note that the sales is an income account, just like fees earned under a financial statement for a service company. We can name it whatever we want, but notice it's under the equity section in terms of the order, assets, liabilities, equity, and then income, then types of expenses generally under that. So the sales account is going to be an income account, all income kind of accounts, no matter if they're called income, whether they're called revenue, whether they're called fees earned, if that's what our income account is for sales, we'll have a credit balance. Now everything under that has generally a debit balance and they all act like basically expenses in that they bring down net income, net income being calculated as sales, less sales being a credit less, all the expenses being debited, bringing us to net income in this case of 34069. But these two accounts, remember, are actually going to be reductions to sales when we make the income statement, meaning a sales return and allowance means that we over reported sales and then there's someone gave the stuff back. So we should, you would think, kind of reduce sales, but we don't reduce sales, we make another account that basically reduces it as a net basis on the income statement. A discount is a discount we give to a client or a customer and therefore again, we would think that we would reduce sales, but what we really do is put it on the sales side not in the sales account on the income statement. So these are kind of like contrast sales account, cost of goods sold are most important expense account down here, meaning it's the cost of the goods that we sold. So whenever we sell inventory, we report the expense of cost of goods sold, which is something that we use in order to help us generate revenue in the same time period. Note that it is generally our largest expense. And so that's one of our most important things. Of course, if we are a merchandiser, then we've got all the other expenses down here and net income being sales minus the expenses. If we put all of this information into the balance sheet in some way, then we should be in balance. If we find a home for everything and we make things go in the right direction, we should then be in balance. Notice that the balance sheet does not have debits and credits. This balance sheet is not in terms of debits and credits. It's in terms of the accounting equation in terms of plus and minus numbers. Why does it not have debits and credits in it? Because we're preparing the balance sheet for people that may not understand debits and credits. We don't want to report debits and credits to individuals that we're trying to present the balance sheet to. Note that I can get everything we want basically from this trial balance. But in order for us to present it, we want to put it in terms of an accounting plus and minus format. So in order to do that, the format will be assets equal liabilities plus owner's equity. And if we just find a home for all these numbers, we'll be okay. So the assets, we are going to break further out into current assets, property, plant, and equipment. That's a breakout basically in terms of liquidity, meaning we're going to order the things in terms of the assets in terms of how liquid they are, meaning how easily can they be used in order for us to consume or buy products or pay our liabilities with. Obviously cash is the most liquid. Then receivables, we expect to convert within 30 days. Therefore it's the second most liquid. And then the inventory, we're still going to call a current asset because we do believe that we will be able to convert the inventory within a short term time period hopefully and then have cash or accounts receivable that will then be cash soon. So notice the format of the sections here. We got current assets, colon, we're going to talk about current assets. We then indent them here and we pull them into the inside. These are not debits and credit columns here. This just means a subtotal. And then we add up the subtotals, the 150 plus the 76 plus the 20,000 adds up to the 246. That is a subtotal of assets. That subtotal being total current assets. So within assets, we have the subtotal of current assets indented and then the total being out in the outer column. That's going to be a general format. If you get used to that format, then you'll get a lot better at reading a lot of financial statements. Then we have the property, plant and equipment, which of course accounts for this 135, 135 and we have the accumulated depreciation. Now note that this is a credit here. We're not going to represent credits here. And personally, I don't even put negative numbers in the financial statement. We know this is a subtraction problem. The way a lot of people tell their readers this is a subtraction problem is with words. It says less means minus. Minus accumulated depreciation. We have an abbreviation here. Therefore, we have a subtotal. We brought that into the inside again. We got the 135, 3 minus the 99, 50 gives us the 36, 250. You can see it up here as a debit minus the credit in terms of debits and credits, and plus and minus the plus, this number minus this number will give us the 36, 250. If you were to add all these up, this plus, this plus, this plus, this minus this, it should add up to total assets of 282, 250, in this case being the subtotals of current assets to 46,000 plus the subtotal of property, plant, equipment, 36, 250, giving us 282, 250. Why is it yellow? Because we're going to see that somewhere else. Where are we going to see it in our accounting equation being assets equal liabilities plus equity? So now we found a home for all these. We've found a home for these. We're going to move down to the liability side. Liabilities we only have one of them. It's going to be a current liability. That current liability being, of course, accounts payable. You'll note that it has a credit balance. We're not going to put credits over here. We're going to put it in terms of a plus and minus format. So we're just going to put a positive number here. I put it to the inside, even though there's only one number, just to show you that same indentation. And then I brought it out to the outside here. We're just adding that same 150 in a similar format as we had over here. If we had long-term liabilities as well as this short-term liability, we would have another subcategory for long-term liabilities. Because there are no other liabilities in this case, we're just going to subtotal liabilities. And that will include just the current stuff, because that's all we have. Long-term liabilities would be things that are due after a year. Short-term liabilities, remember, are things that are due within a year. So we have the subtotal out here for liabilities. And then we have owner's equity. There's two halves, of course, to the second side of the balance sheet. And the equity is usually the most confusing thing to think about because it includes the entire income statement and draws. So if we think about it in terms of the trial balance, now we found a home for all of this stuff. And the rest of it is all of this stuff, from capital down to the end. And notice what we're looking at in terms of the balance sheet means that everything else is part of this number. So if I was to add this up and just work the balance sheet from the trial balance, it would be the capital of 248.181 minus the draws because it's a debit of 15 plus the sales because it's a credit of 304.380 minus the sales returns, minus the discounts, minus the cost gets sold, minus all other expenses. If we did that, then we would come up to the 267.250. That is why the equity section is all blue here. All this blue represents the combination of the one number as of this point in time. So if we eliminated all of these accounts and just called it equity, we could still have a double entry accounting, but it wouldn't give us that much detail about the equity. And what detail do we want about the equity? We want to know how much we made last year. We want to know timing. But just so you can see the double entry accounting system and see how you can get the entire balance sheet from the adjusted trial balance. Just note that if we just highlighted these in Excel or added up the credits minus the debits, we would come up to this number. Then if we add up the liabilities and the equity, we would come up with the 282.250. Therefore the assets equal the liabilities plus equity. That's the balance sheet. That's where we stand as of a point in time. Now what do we want to know more than that? If we're decision makers, we probably want to know more about how we got here. This is basically where we're standing, meaning that if I want to know what the value of this company is on a book basis, we could take the accounting equation assets equal liabilities plus owners equity, change it mathematically to assets minus liabilities equals equity. So if the company owns 282.250, they owe somebody else 15,000, then this minus this means that they owe the owner or the book value whoever owns the company should theoretically be able to sell the company if they so choose walk away with 267.250. Of course, that's on a book basis, but that's the book value of the financial statements as of this point in time. How did we get to that book value? So we could have a similar question if we were going to ask Bill Gates, how did you get to this point in time to have this much money? Well then we'd have to tell the story and the story starts with often an income statement. The income statement has a beginning and an end. We've got the beginning and the end. We have to. So if you were going to ask somebody how much money do you earn? They would have to basically assume, well, what do you mean a year? Do you mean a month? Do you mean a pay period? Without that knowledge or without assuming that knowledge, we cannot basically answer that question. In this case, we're going to talk about the month ended for December 31st. What does that mean? It means the December 1st through December 31st. That's how we did for this time period. And what we're going to do is take up the information from the income portion of the adjusted trial balance. So that's these numbers. So this number on down, the ones that are the darker color of blue starting with sales. So note that in a single step income statement and or in an income statement for a service company, it's really very basic. We have less subcategories, meaning we're just going to have income minus all the expenses. And that'll be the end number. This statement looks a lot more complex because now we're going to group it by other subcategories. Why are we doing that? Because we want to know more about these subcategories and how they affect our net income. So here's the bottom line, 34069 same bottom line here with just this simple set of numbers. But note that this income statement is much longer because we're adding subgroups. Why? Because they're going to help our reader make certain decisions. Now if we have a very simplified reader and they just want the bottom line, we might just make a single step income statement, say, hey, here's sales, here's the net income. That's what you want to know. If we want someone needs more detail such as these types of relationships, we'll do a multi-step income statement which will look something like this. So of course sales will be up here. Sales is a credit. We're not going to have credits on this side because we're in terms of a plus and minus statement. We've got the sales represented with this 304 380. Then we're going to reduce those kind of contra sales accounts. Contra sales accounts are going to be the sales returns and allowances and discounts. They act like expenses here but they're really things that could have easily been seen as a reduction to sales. Sales was overstated by the fact that we sold stuff that then people returned. Sales was overstated by the discount that we didn't report here. We posted it at full price then gave a discount. Therefore we're going to pull these in and I'm going to say less sales return, less discount. So we're not going to show a subtraction sign in this case with a negative number. Some financial statements may, many financial statements will report it with words. It's a subtraction problem. If we add those two up, notice they've been pulled into this side. This plus this adds up to the 24745. So these are two reductions and then that will give us net sales. That's a subcategory. Note that net sales is not the same as net income. So keep that very handy in mind because that'll help with a lot of problems. Net sales means sales less returns and allowances which is way different than net income which is after all sales returns and allowances and all expenses. So that will give us net sales which is the 279. That's a subtotal. You don't see that here. That's this minus these two. Then we're going to subtract out the most important expense. That expense being cost a good soul. It doesn't have the word expense in it but it is an expense why it's the fact that we had to consume inventory on asset in order to help us generate this revenue in the same time period. It's the most important expense because if we sell just inventory, the relationship between the sales price and the cost of the stuff we sold is the most important relationship. That's what can really affect the income statement the most. Therefore we're going to make a separate subcategory cost of goods sold. Notice this number is pulled in here. We have the subcategory of net sales less cost of goods sold. I'm not going to say less in this case because it's fairly assumed or it's fairly standard. That will give us what we call gross profit. New terminology for merchandising company because this gross profit, this relationship between the sales and the gross profit, the sales and the cost of goods sold is such a big relationship we want to break that out. That's going to give us gross profit. Then we're going to have to do everything else and we're going to have two more subcategories here because we could have selling type expenses and we could have general and administrative type expenses. Again, oftentimes we want to separate those two. We want to say, hey, what's the store doing? How are they doing in terms of cost and how is the office doing in terms of like the accounting department and the people running the office situation? We have expenses here. Notice we have the colon again. Then we have selling expenses colon again. Then we've indented one more time and all these indicating that these are part of the selling expenses. Note what the selling expenses are. We've got the selling salaries, which of course are being pulled here, pulled here, and all these store supplies advertising, everything related to the sales. Those are pulled inside. Once again, these are not debit and credit columns. This is just subcategorizing the selling expenses. Then we add those up. So the 41.7 plus the 14.306 plus the 3.654 plus the 25.872 equals the 85.531, which is the total selling expenses. Then we're going to calculate the rest of them, the general and administrative expenses, which will include the office expense, the rent expense, and the office supplies. So again, we indent these and then I'm going to indent again adding up this subcategory out here. So we can now see that this subcategory, this subcategory, and this subcategory represent all numbers under sales and below. We found a home for all these numbers. We know that the credit minus all these debits equals this 34.069. If we do this correctly over here, it should also equal 34.069. We're going to add the outer column or do something to the outer column, actually subtracted at this point. Notice we're not jumping from column to column. We're only going to do things with one column in this case. In this case, we added up the expenses being the 85.531 plus the 42.919 gives us the 128.450. That's going to be the expenses other than the cost of goods sold. Then we're going to take the gross profit 162.519 minus the 128.450 gives us the net income finally of 34.69. So this looks like a very complex process and it is a lot of subtotaling. But notice in simplistic ways, it's just basic going to be the credit less all the debits or the income less all the expenses. The thing that has changed of course are these subtotals. These subtotals can give us a lot of useful information to analysis of the financial statements. All right, last financial, now we know that that 34.069, why is it yellow? It's going to be included in other financial statements included in in this case, the statement of owner's equity. So now we found a home for all these and the balance sheet. We found a home for all these specifically on the income statement, even though they were included in the blue number on the balance sheet. What we have not found a home for is the capital and the draws. So that's what we're going to do on the statement of owner's equity. The most confusing thing to most people or it was to me is that the capital account reported on the adjusted trial balance is this number 248181. It does not get pulled over to any financial statement just in that format because on the financial statements we've got two capitals on the statement of owner's equity. We've got where we started and we've got where we ended. And that's not clear on the trial balance. The amount on the trial balance that says capital in this case is where we started. Why is it where we started? Because we know that all this other stuff is going to be in this number as we saw on the balance sheet when we're done. So when we're done, if I added up all this stuff, it would add up to where we end of 267250. So this number here is where we start. Notice again, we're going to represent it as a plus and minus number. These are not debit and credit columns. It's represented as just a positive number. I pulled it to the outside. That's just the format we usually take. Then net income, which comes from the income statement we just calculated. Or you can see it's right here. Once again, it's a credit. I'm not represented with a credit here. Just a number that we're going to put in there. We're going to add income and then we're going to say less draws. And notice I don't say in word add income because the assumption is just like if there's no negative, it's generally a positive. So the adding is often just assumed. If it's a subtraction problem, it will often put less draws. The last thing we haven't found a home for is draws. Draws represents the money that was pulled out from the owner. Therefore it's going to reduce the amount that is owed to the owner. And so it needs to reduce the owner's equity. So the 34069 less draws gives us a net increase, 34 minus the 15 of the 1969. Therefore the 248181 beginning capital minus basically everything else that happened. Notice these two numbers represent everything else. This is represented by the yellow number, the net income and of course draws is represented by draws. So this represents all blue numbers and therefore the 248 plus the 1969 gives us the ending balance of 267-250 which we already calculated on the balance sheet. So here it is on the balance sheet right there. So where does this number come from? Well we know it should tie out to the statement of owner's equity. So there's the statement of owner's equity. If we look at the numbers that will tie out, we see that the assets of course must equal that the liability and owner's equity. And then you might be saying well how does this tie in to the other statements? Well we know that the capital account is going to be one number that is coming from the statement of owner's equity. In order to get to the capital account on the statement of owner's equity, it's going to be the beginning equity plus the activity for the year. How did we do? That's called net income. So net income should tie out to the statement of owner's equity minus the draw. So this is how the statements are related. Remember that the entire balancing statement though is as of a point in time on the balance sheet total assets equal liabilities plus owner's equity. All right so we are now able to describe financial statements for a merchandising company, explain the differences and similarities between financial statements for a merchandising company versus financial statements for a service company and explain the relationship between the balance sheet income statement and statement of equity.