Cost of Merchandise Sold

1. Cost of Merchandise Sold The Big Picture

2. Income Statement $4,000 Let’s say -- Sales for the month were $4,000

3. Cost of Merchandise Sold Now …$4,000 in sales does not mean net income… We have to take out the cost of the items we sold $1,400 Cost of product $2,600 left $4,000 $4,000 - $1,400 (Cost of Merchandise Sold) = $2,600

4. Cost of Merchandise Sold The $2,600 left after we pay for the product - is not clear income …we have to subtract expenses. $1,400 Cost of product $1,000 Expenses Expenses include selling and administrative. $4,000 $1,600 left Net Profit Let’s say total expenses were $1,000

5. Let’s look at that again. $1,400 Cost of product $1,000 Expenses OK, Every company would like the bottom square to be the largest. $1,600 left Net Profit

6. To increase Net Profit $1,400 Cost of product To do that a company can a) decrease cost of product b) decrease expenses a $1,000 Expenses b $1,600 left Net Profit

7. Cost of Merchandise Sold We just illustrated the Income Statement... Net Sales - Cost of Merchandise Sold Equals Gross Profit Gross Profit - Expenses = Net Profit