Question

On the income statement of a merchandising company, interest income and interest expense are reported:

Select one:

A. As part of cost of goods sold

B. As separate items of other income and expense below the net operating income or loss

C. By showing interest income as additional sales revenue and interest expense as an operating expense

D. By offsetting interest income and interest expense and showing the excess as an operating revenue or expense

Answer 1

On the income statement of a merchandising company, interest income and interest expense are reported:

B. As separate items of other income and expense below the net operating income or loss

Explanation:

A merchandising company uses the same 4 financial statements: Income statement, statement of retained earnings, balance sheet, and statement of cash flows.The income statement for a merchandiser contains groupings and subheadings necessary to make it easier for investors to read and understand.

Income statement divides both revenues and expenses into operating and nonoperating (other) items.

The major headings of the income statement are explained below:

• Net Sales are the revenues generated by the major activities of the business—usually the sale of products or services or both less any sales discounts and sales returns and allowances.
• Cost of goods sold is the major expense in merchandising companies and represents what the seller paid for the inventory it has sold.
• Gross margin or gross profit is the net sales – cost of goods sold and represents the amount we charge customers above what we paid for the items. This is also referred to as a company’s markup.
• Operating expenses for a merchandising company are those expenses, other than cost of goods sold, incurred in the normal business functions of a company. Usually, operating expenses are either selling expenses or administrative expenses.
• Income from Operations is Gross profit (or margin) – operating expenses and represents the amount of income directly earned by business operations.
• Other revenues and expenses are revenues and expenses not related to the sale of products or services regularly offered for sale by a business.   This typically includes interest earned (interest revenue) and interest owed (interest expense).
• Net Income is the income earned after other revenues are added and other expenses are subtracted.

As the Interest Income and Interesy Expense are not directly related to the business of the merchandising company; the same are reported as separate items of Other Income and expenses below the net operating Income or Loss.