As a Financial Accountant, determine the best type of income statement a retailer should use. Defend your suggestion. Based on your analysis, recommend the most accurate valuation method that reflects current economic conditions. Include a rationale for your recommendation.
Answer and Explanation:
A multi-step income statement would be beneficial for a retail operation due to the structure of the report breaking down costs between direct and operational expenses. The statement begins with sales and allows for returns and allowance and discounts to determine net sales. The statement then accounts for direct costs which are the costs of generating the revenue reported. The valuation of the inventory sold can fluctuate during time periods however the retail inventory method may be beneficial for retailers because it uses the historical markup percentage for a companies inventory to calculate estimated ending inventory. When the markup changes on inventory such as in holiday periods the LIFO method might be more beneficial in calculating inventory value. Sales less direct costs allows for the calculation of gross profit which is the amount of funds remaining to service operational expenses and support profit. The income statement then accounts for operational expenses which are the indirect costs of doing business such as employee sales, rent , and utilities. Operational profit is then calculated by subtracting gross profit from operational expenses. Finally miscellaneous items not directly related to operational costs are accounted for before the calculation of net profit.
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from Accounting 101: Financial AccountingChapter 8 / Lesson 5