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Case Study: Expanded Income Statement

Author: Sophia
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what's covered
This lesson will cover the preparation of an expanded income statement in the context of a case study, using a hypothetical merchandising company. Specifically, this lesson will cover:

Table of Contents

1. Case Study: Legacy Clothing

The subject company for our case study is called Legacy Clothing. Legacy Clothing is a sole proprietorship, which is a company that is owned by a single individual, and where that individual and the business are legally treated as the same.

The purpose of Legacy Clothing as a business is to own and operate clothing/merchandise stores. It is similar to a department store chain, selling men's, women's, and children's clothing and other related items. Legacy Clothing has locations throughout Washington, DC, and they have a large staff of 50 people employed in their stores.

Legacy Clothing
Type of company Sole proprietorship
Business purpose Own and operate clothing/merchandise stores
Business location(s) Washington, D.C.
Staff of 50 people

The Legacy Clothing needs an expanded income statement in order to understand the business's profitability. An expanded income statement can help Legacy Clothing determine the health and strength of their business, which is important information for owners, potential investors, and the banks that they are dealing with.

An expanded income statement also helps Legacy Clothing to understand the specific needs for their merchandising business, by providing critical information such as net sales, net purchases, and cost of goods sold, so that they are able to perform an analysis on that information to fully understand their business.

2. Case Study: Expanded Income Statement

Let's look at preparing an expanded income statement for Legacy Clothing. Recall that the formula for creating an expanded income statement is:

formula to know
Expanded Income Statement
table attributes columnalign right end attributes row Sales row cell stack negative space Cost space of space Goods space Sold with bar below end cell row cell Gross space Profit end cell row cell stack negative space Operating space Expenses with bar below end cell row cell Income space from space Operations end cell row cell stack negative space Other space Revenues space left parenthesis Expenses right parenthesis with bar below end cell row cell Net space Income end cell end table

The starting point for preparing our financial statements is using information from the adjusted trial balance.

Table titled Adjusted Trial Balance. The listed items and their corresponding amounts are as follows:
Sales Cr. $990,000, Sales returns and allowances Dr. $30,000,
Sales discounts Dr. $15,000,
Purchases Dr. $163,000,
Purchase returns and allowances Cr. $10,000,
Purchase discounts Cr. $5,000,
Freight-in Dr. $5,000,
Salaries expense Dr. $360,000,
Advertising expense Dr. $10,000,
Rent expense Dr. $50,000,
Interest expense Dr. $20,000,
Depreciation expense: Buildings Dr. $15,000,
Insurance expense Dr. $4,000, and
Supplies expense Dr. $2,500.
View this spreadsheet in Google Sheets

2a. Sales Calculation

The first calculation is gross sales. We pull that sales number information, as you can see below, from our adjusted trial balance. Then, we can pull in our sales returns and allowances, as well as our sales discounts, which also come from the adjusted trial balance. This total provides our net sales.

Table titled Adjusted Trial Balance. The items and their corresponding amounts needed for this stage are as follows: Sales Cr. $990,000, Sales Returns and Allowances Dr. $30,000, Sales Discounts Dr. $15,000.
View this spreadsheet in Google Sheets

Now, this information can be added to the expanded income statement. We also need to put in our header, which includes our company name, Legacy Clothing, "Income statement," and "For the period ending December 31, 2022."

formula to know
Expanded Sales Calculation
Gross space Sales minus Sales space Returns space and space Allowances minus Discounts equals Net space Sales

Table titled Expanded Income Statement for Legacy Clothing for the period ending December 31, 2022. The listed items and their corresponding amounts are as follows:
Sales $990,000,
Sales return and allowances $30,000,
Sales discounts $15,000,
Total $45,000, Net sales $945,000.
View this spreadsheet in Google Sheets

2b. Cost of Goods Sold Calculation

The next piece needed is to calculate our cost of goods sold. In order to do this, let's dive deeper into the cost of goods sold calculation. To calculate cost of goods sold, we start with our beginning inventory from the beginning of the year, which in this case, was $200,000.

Then, we pull in our purchases from our adjusted trial balance. From purchases, we subtract our purchase returns and allowances, as well as subtract our purchase discounts--all information pulled from the adjusted trial balance--to give us our net purchases. Now, we take those net purchases and add freight-in, which is the shipping costs to get those purchases to our business. This provides our cost of goods purchased.

Table titled Adjusted Trial Balance. The items and their corresponding amounts needed for this stage are as follows:
Purchases Dr. $163,000,
Purchase returns and allowances Cr. $10,000,
Purchase discounts Cr. $5,000, and
Freight-in Dr. $5,000.
View this spreadsheet in Google Sheets

Finally, we take our beginning inventory and add cost of goods purchased to give us our goods available for sale. Once we have this figure, we can subtract out our ending inventory, which in this case, was $125,000, to give us our cost of goods sold.

formula to know
Cost of Goods Sold
table attributes columnalign right end attributes row cell Beginning space Inventory end cell row cell stack plus space Cost space of space Goods space Purchased with bar below end cell row cell Goods space Available space for space Sale end cell row cell stack negative space Ending space Inventory with bar below end cell row cell Cost space of space Goods space Sold end cell end table

Table titled Cost of Goods Sold Calculation. The listed items and their corresponding amounts are as follows:
Beginning inventory $200,000,
Purchases $163,000,
Subtract: Purchase returns and allowances $10,000,
Purchase discounts $5,000,
Total subtract $15,000.
Net purchases $148,000. Add Freight-in $5,000.
Cost of goods purchased $153,000.
Goods available for sale $353,000.
Ending inventory $125,000.
Cost of goods sold $228,000.
View this spreadsheet in Google Sheets

We will take this cost of goods sold number and put it into our expanded income statement. Returning to the income statement, now we can plug in our $228,000 cost of goods sold figure. Then, we take our net sales and subtract cost of goods sold to give us our gross profit of $717,000.

Table titled Expanded Income Statement for Legacy Clothing for the period ending December 31, 2022. The listed items and their corresponding amounts are as follows:
Sales $990,000,
Sales return and allowances $30,000,
Sales discounts $15,000,
Total $45,000, Net sales $945,000,
Cost of goods sold $228,000, Gross profit $717,000.
View this spreadsheet in Google Sheets

2c. Expenses Calculation

Now we can detail the operating expenses, which, again, we pull from our adjusted trial balance. Therefore, we pull in our salaries expense, advertising expense, rent expense, depreciation expense, insurance, and supplies, which are all of our operating expenses. We subtract our operating expenses from our gross profit to give us income from operations.

However, we're not quite done yet. Now we need to plug in any other revenue or expense items that we might have. In this case, all we have is our interest expense.

Table titled Adjusted Trial Balance. The items and their corresponding amounts needed for this stage are as follows: Salaries expense Dr. $360,000,
Advertising expense Dr. $10,000,
Rent expense Dr. $50,000,
Interest expense Dr. $20,000,
Depreciation expense: Buildings Dr. $15,000,
Insurance expense Dr. $4,000,
Supplies expense Dr. $2,500.
View this spreadsheet in Google Sheets

Finally, we take our income from operations, subtract out our interest expense, to give us our net income.

This is what the final expanded income statement looks like for our subject company, Legacy Clothing.

formula to know
Expanded Income Statement
table attributes columnalign right end attributes row Sales row cell stack negative space Cost space of space Goods space Sold with bar below end cell row cell Gross space Profit end cell row cell stack negative space Operating space Expenses with bar below end cell row cell Income space from space Operations end cell row cell stack negative space Other space Revenues space left parenthesis Expenses right parenthesis with bar below end cell row cell Net space Income end cell end table

Table titled Expanded income statement for Legacy Clothing for the period ending December 31, 2022. Table titled Expanded Income Statement for Legacy Clothing for the period ending December 31, 2022. The listed items and their corresponding amounts are as follows:
Sales $990,000,
Sales return and allowances $30,000,
Sales discounts $15,000,
Total $45,000, Net sales $945,000,
Cost of goods sold $228,000, Gross profit $717,000. The following items and their corresponding amounts are listed under operating expenses:
Salaries expense $360,000,
Advertising expense $10,000,
Rent expense $50,000, Depreciation expense: Buildings $15,000,
Insurance expense $6,000,
Supplies expense $2,500,
Total $443,500. Income from operations $273,500. Other revenue (Expenses)
Interest expense $20,000. Net income $253,500.
View this spreadsheet in Google Sheets

watch

summary
Today we introduced our case study company called Legacy Clothing, that is in the business of owning and operating multiple department store locations, selling men's, women's, and children's clothing and other related items. We walked through an example of preparing an expanded income statement for Legacy Clothing, using our adjusted trial balance and calculating cost of goods sold to prepare the expanded income statement.

Source: THIS TUTORIAL WAS AUTHORED BY EVAN MCLAUGHLIN FOR SOPHIA LEARNING. PLEASE SEE OUR TERMS OF USE.

Formulas to Know
Cost of Goods Sold

table attributes columnalign right end attributes row cell Beginning space Inventory end cell row cell stack plus space Cost space of space Goods space Purchased with bar below end cell row cell Goods space Available space for space Sale end cell row cell stack negative space Ending space Inventory with bar below end cell row cell Cost space of space Goods space Sold end cell end table

Expanded Income Statement

table attributes columnalign right end attributes row Sales row cell stack negative space Cost space of space Goods space Sold with bar below end cell row cell Gross space Profit end cell row cell stack negative space Operating space Expenses with bar below end cell row cell Income space from space Operations end cell row cell stack negative space Other space Revenues space left parenthesis Expenses right parenthesis with bar below end cell row cell Net space Income end cell end table

Expanded Sales Calculation

Gross space Sales minus Sales space Returns space and space Allowances minus Discounts equals Net space Sales

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