Financial Accounting: An Integrated Statements Approach, 2nd Edition

Chapter 5 Accounting for Merchandise Operations 213

Exhibit 2 shows that Home Depot earned a gross profit of $24,430 million, based

upon net sales of $73,094 million. Operating expenses reduce gross profit to an oper-

ating income of $7,926 million. Adding other income and subtracting income taxes

results in net income of $5,001 million.

In addition to operating and income statement differences, merchandise inventory

on hand (not sold) at the end of the accounting period is reported on the balance sheet

asmerchandise inventory. Since merchandise is normally sold within a year, it is re-

ported as a current asset on the balance sheet.

FINANCIAL STATEMENTS FOR A

MERCHANDISING BUSINESS

In this section, we continue the illustration from Chapter 4, illustrating the financial

statements for Online Solutions after it becomes a retailer of computer hardware and

software. These financial statements are similar to those for a service business.

During 2008, we assume that Janet Moore implemented the second phase of Online

Solutions’ business plan. Accordingly, Janet notified clients that beginning January 1,

Home Depot Inc.

Condensed Income Statement

For the Year Ending January 30, 2005

(in millions)

Net sales $73,094

Cost of merchandise sold 48,664

Gross profit $24,430

Operating expenses 16,504

Operating income $ 7,926

Other income and (expense) (14)

Income before taxes $ 7,912

Income taxes 2,911

Net income $ 5,001

Exhibit 2

Home Depot Income

Statement

Under One Roof at JCPenney

HOW BUSINESSES MAKE MONEY

Most businesses cannot be all things to all people. Busi-
nesses must seek a position in the marketplace to serve
a unique customer need. Companies that are unable
to do this can be squeezed out of the marketplace.
The mall-based department store has been under pres-
sure from both ends of the retail spectrum. At the dis-
count store end of the market, Wal-Marthas been a
formidable competitor. At the high end, specialty re-
tailers have established a strong presence in identi-
fiable niches, such as electronics and apparel. Over
a decade ago, JCPenneyabandoned its “hard
goods,” such as electronics and sporting goods, in favor of

providing “soft goods” because of the emerging strength of spe-

cialty retailers in the hard goods segments. JCPenney

is positioning itself against these forces by “exceed-

ing the fashion, quality, selection, and service com-

ponents of the discounter, equaling the merchandise

intensity of the specialty store, and providing the se-

lection and ‘under one roof’ shopping convenience

of the department store.”JCPenney merchandise

emphasis is focused toward customers it terms the

“modern spender” and “starting outs.” It views these

segments as most likely to value its higher-end mer-

chandise offered under the convenience of “one roof.”

Describe and illustrate the
financial statements of a
merchandising business.

2