Introduction to Inventories and the Classified Income Statement

Read this chapter and pay attention to the comparison of the two income statements. This chapter reviews the difference in reporting and financial presentation of information for service and merchandising operations and compares recording inventories for two separate types of businesses.

Analyzing and using the financial results - Gross margin percentage

As discussed earlier, you can calculate the gross margin percentage by using the following formula:

$\text { Gross margin percentage }=\frac{\text { Gross margin }}{\text { Net sales }}$

To demonstrate the use of this ratio, consider the following information from the 2000 Annual Report of Abercrombie & Fitch.

($millions)	2000	1999	1998
Revenues	$1,238.6	$1,030.9	$805.2
Gross profit	509.4	450.4	331.4
Gross profit (margin) percentage	$509.5/$1,238.6 = 41.13%	$450.4/$1,030.9 = 43.69%	$331.4/$805.2 = 41.16%

Abercrombie's gross margin held at a rather high 41-43 per cent over those three years.

You should now understand the distinction between accounting for a service company and a merchandising company. The next chapter continues the discussion of merchandise inventory carried by merchandising companies.