Profit And Loss Statement

Gross sales
(--minus) Customer returns and allowance
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= Net sales
(--minus) Cost of goods sold
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= Gross Margin
(--minus) Operating Expenses
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= Profit
 Total cost of merchandise sold
• Billed cost – the price at which goods are
purchased and which appears on the invoice of the
vendor’s bill
• Inward freight or transportation charges- the
amount the vendor may charge for the delivery of
merchandise. Inward freight plus billed cost is
called the billed delivered cost
• Alteration and workroom costs- the amt that
selling dept may be charged for which is necessary
to put the merchandise in condition for sale
( Assembling, polishing etc). It is treated as
additional cost since it applies to only to the goods
that have been sold and not to to all purchases.
• Cash Discounts-discounts which vendors may
grant for payment of an invoice within a specified
 Total cost of merchandise sold
Billed costs
(plus) Inward freight or transportation
charges
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Billed delivered cost
(plus) Workroom costs
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Gross Merchandise cost
(minus) Cash Discount
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Total cost of merchandise sold
 Cost of goods sold consists of

1. Beginning inventory
Is the cost of merchandise on hand at the
start of a specified period of time .The
beginning or opening inventory is the
ending inventory for the previous period.
Cost of goods sold consists of
2. Gross Billed Purchases
(Billed cost)
Is the price stated on the vendors
invoice prior to deducting the cash
discounts from the list price.
Cost of goods sold consists of

3. Closing Inventory
is the cost value of the merchandise
on hand at the end of the accounting
period.
 Cost of goods sold consists of
4.Earned Discount( cash discount)
They are a % reduction in the billed cost price of
the merchandise; they are earned by the retailer
for the prompt payment of the invoice on or
before the expiration of cash discount period
indicated on the invoice. Cash discount
contributes to the retailers profit in the sense that
the cost reduction has never been passed onto the
customer. But the cost of merchandise sold has
been overstated, and at this point the operating
statement must be adjusted to reflect the real value
 Cost of goods sold consists of
5. Alteration and workroom Costs
Consists of expenditure incurred in altering goods for
customer and /or inventory repair. Functions of
workroom are to alter or repair merchandise sold or in
stock and to prepare goods for delivery to customers.
The alterations provide the form utility to complete th
garment to the customer’s satisfaction, only then the
transaction. The primary function of the service
workroom is to provide service to the selling dept
and customer, rather than to generate income.
 Cost of goods sold consists of
6. Transportation costs :-
Because more companies today are geographically
widening their sources for merchandise and
because shipping charges are rising, the
negotiation of transportation costs and handling
responsibilities is of major importance.
Transportation costs assumed by the store are
considered part of the cot of the merchandise and
must be covered in the retail price. Because
transportation cost is become part of the cost of
the merchandise,it is important that the retailer
negotiates for advantageous shipping charges as a
means of reducing the total cost of goods
 Transportation costs
• FOB – Free on Board indicates the point at which
ownership of the merchandise changes e.g. store,
plant, factory, warehouse, port.
• FOB Factory-in this arrangement the retailer
takes title to the merchandise at the point of the
shipment(factory). The retailer takes all
transportation charges and assumes all risks for
the goods while in transit.
 Transportation costs
• FOB Destination- this agreement states
that the vendor pays all transportation costs
and retains title to to the merchandise until
it arrives at the place designated by the
buyer. Also stated as FOB store or FOB
buyer’s warehouse.
 Transportation costs
• FOB Shipping (consolidation) point. This
agreement means that the vendor pays any crating
and transportation costs for getting the goods to
the shipping company that will transport the goods
to the retailer.
• The retailer takes ownership of the goods at the
point and is responsible for the cost of getting the
goods to the store or receiving point.
 Transportation costs
• FOB Destination,(Charges Reversed).
This agreement indicates that the vendor
owns the goods until they get to the buyer’s
designated point,however the retailer agrees
to pay the transportation.
 Transportation costs
• In most cases the transportation charges must be
prepaid. This means transportation costs are paid
by the vendor when the merchandise is delivered
to the carrier such as UPS, a freight forwarder, etc.
• When the merchandise is FOB Factory and freight
has been prepaid, the retailer reimburses the
vendor for the shipping charges to he cost of the
merchandise. The amount remitted to the vendor
equals the net cost of merchandise plus the cost of
transportation
 Problem 1
• Merchandise with total quoted cost of
$1312 was billed on an invoice dated March
18 with terms of8/10 EOM, anticipation not
permitted, FOB Factory. Transportation
costs of $12.87 were prepaid. How much
should be remitted to the vendor if the
invoice is paid April 10?
 Solution 1
$1312 less 8% = $1207.04
(plus) transportation + 12.87
==========================
Amount to be repaid = $1219.91
 Problem 2

• An invoice for $2500 was dated June 15

with terms of 6/10,n/30 anticipation not
permitted. FOB Store. Freight charges were
$265. What amount was to be remitted if
the retailer paid the bill on June 24?
 Solution 2
• FOB store means the vendor is responsible
for the transportation costs.
• $2500 less 6% = $2350
• Amount to be paid = $2350
• The retailer does not reimburse the vendor
for transportation.
 Problems
1. An invoice for costume jewelry is dated October
22 with terms of 3/10,n/30, FOB Providence,
Rhode island (vendors warehouse). The total billed
cost of the merchandise is $956.20 and shipping
charges of $12.80 have been prepaid. If the
invoice is paid on Nov 10, how much is remitted?
2. Merchandise with a total billed cost of $2230
arrived at the store on May 16. Terms of the
invoice dated April 25 were 3/10 ROG, FOB store.
no anticipation permitted. Transportation charges
were $128. If paid on May 21, how much should
be remitted?
 Problems
3.A sportswear buyer receives a shipment of
40 dozen pairs of pants costing $21each.
The invoice is dated April 29 with terms
6/10 EOM, FOB store. No anticipation
permitted. Shipping charges are $182. If the
bill was paid on May11, how much is
remitted?
 Problems
4. A hosiery manufacturer in North Carolina has
agreed to extend the dating so that the retailer can
use a cheaper but slower method of transportation.
Rather than the customary terms of 2/10, terms of
2/10-30x, anticipation permitted, have been agreed
upon. Transportation is FOB factory.
Merchandise with a billed cost of $987.40 was
shipped on April 14 with transportation charges of
$14.80 prepaid. If the invoice is paid on May 10,
how much is remitted?
 Operating Expenses
Various expenses are incurred
by the operation of the
business. If expenses exceed
gross margin a loss occurs.
There are primarily 2 ways of
classifying expenses: -
Direct expenses
Indirect expenses
 Operating Expenses

Direct expenses are the result of the operation

of one specific dept and would not occur if
the dept were eliminated. E.g. salaries of sales
personnel, dept advertising, selling supplies,
buyer’s salaries,advertising, selling supplies,
delivery to customers, buyer’s travel, and
rental space for the dept.
 Operating Expenses

Indirect expenses benefit the store as a

whole and would continue even if a
particular dept were discontinued. E.g.
store maintenance, insurance,
depreciation of equipment, salaries of
senior executives, and institutional
advertising.