I was given a problem that require me to make an income statement for a business. The question states that the company uses the perpetual inventory system. And it wants me to show details of net sales and operating expenses. What is perpetual inventory system and how will a statement using it be different from a plain ol income statement?

I do not understand this class at all. I even have tutoring and am failing terrible. If I do not pas this class with at least a C then my financial aid is taken away. I'm making A's in all my other classes.

Well, showing the details of the operating expenses is not related to the perpetual inventory system.

The main three sections of your income statement (at the level you're at anyway) will be: Gross Profit Section, Operating Expenses Section, and "Other" Section. Actually, you may not even have that third section.

I'll return to the Gross Profit section in a sec to account for that perpetual thing. But the basic idea of this section is:

Gross Sales
- Returns
- Discounts
= Net Sales
-Cost of Goods Sold
= Gross Profit

The gross profit is how much you sold the stuff for above how much you purchased it for. Cost of Goods Sold represents the total you paid for the things that you sold. (i.e. you paid $10 for something and sold it for $15, your gross profit is $5.)

Then come the Operating Expenses. These generally consist of Selling Expenses and Administrative (General) Expenses. Really, if you're given like a trial balance, these accounts should already all be in order. We set up accounts in a certain order on purpose, cause that's how we want them. But sometimes books are nasty creatures and they list them alphabetically or something. But if they're in order, it's just a matter of finding the end of one section and the beginning of the next. Selling Expenses will consist of anything that says "selling" or "store" or "sales" on it, plus stuff like advertising which is related to selling. Then the Administrative Expenses are things that have "office" on them, or basically anything else left over not included in selling, such as rent, insurance, etc. For things like salaries or depreciation, you need to be looking for those words indicating which it is. i.e. Sales Salaries as opposed to Office Salaries, or Depreciation on Store Equipment versus Office Equipment.

The "other" section will consist of things like interest revenue, interest expense, rent revenue, assuming those things are not what the company does for business. i.e. if you're not a landlord, rent revenue isn't your normal business.

You should have an example in your book of all this to follow. If not, find yourself an accounting book at the library because most of them do have an example of this.

Now, as for the perpetual system. Costs of Goods Sold is not directly used as an account in that system, so that number up in your Gross Profit section is something you now have to calculate. Whether you have to show this calculation on the statement will depend on your book. But the calculation is as follows:

Beginning Inventory
+Net Purchases
=Available for Sale
-Ending Inventory
=Cost of Goods Sold

Unfortunately, you also might have to calculate Net Purchases, making it more complicated. If so:
Gross Purchases
-Returns
=Net Purchases
+Transportation
=Ha! Don't know what to call this, but it would be the bottom-line purchases
that you would insert into the cost of goods sold calculation above

(Been too long since I've actually done perpetual. :-))

Hope that at least gives you an idea and gets you started.

Quote:

---

Originally Posted by aneangel22

I was given a problem that require me to make an income statement for a business. The question states that the company uses the perpetual inventory system. And it wants me to show details of net sales and operating expenses. What is perpetual inventory system and how will a statement using it be different from a plain ol income statement?

I do not understand this class at all. I even have tutoring and am failing terrible. If I do not pas this class with at least a C then my financial aid is taken away. I'm making A's in all my other classes.

---

Thank you so much! This stuff is so confusing to me. This is a better answer than I got from my professor. Some professors have absolutely not business teaching others. Thanks again!