A company can report purchases and net purchases on its income statement to show the costs it paid to buy inventory during an accounting period. The purchases line item on the income statement is the total invoice cost the company's suppliers billed for the inventory, and net purchases is the amount the company paid excluding returns and discounts. You can calculate net purchases using items provided on the income statement to determine how much a company paid for inventory. This amount reduces a company's gross profit and net profit, which are two different levels of profitability on the income statement.
Step 1
Find the amounts of the line items called "purchases" and "freight-in" on a company's income statement. The freight-in line item represents the shipping costs to have its inventory delivered. For example, assume the company's purchases are $100,000 and its freight-in costs are $20,000.
Step 2
Add the company's freight-in costs to its purchases. For example, add $20,000 in freight-in costs to $100,000 in purchases, which equals $120,000.
Step 3
Find the amounts of the line items called "purchase discounts" and "purchase returns and allowances" on the income statement. A supplier provides a purchase discount when a company pays its invoice within a certain time period. Purchase returns and allowances occur when a company returns merchandise to a supplier. For example, assume the company has $5,000 in purchase discounts and $10,000 in purchase returns and allowances for the accounting period.
Step 4
Subtract the company's purchase discounts and purchase returns and allowances from your Step 2 result to calculate net purchases for the accounting period. For example, subtract $5,000 in purchase discounts and $10,000 in purchase returns and allowances from $120,000. This equals $105,000 in net purchases for the accounting period.