Question

In this area, we will discuss the accounting-for-inventory transactions of merchandising companies, the two formats of preparing the income statement, and how to evaluate the profitability of a merchandising company. We will also discuss how companies determine the year-end inventory value and cost of goods sold using one of the cost-flow assumptions. Finally, we will examine the impact of choosing a certain cost-flow assumption on the tax liability and other financial statement numbers of a company.

Let's begin with this question: How is the income statement of a merchandising company different from that of a service company?

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Answer 1

Main difference between merchandising company and service company is the presence of inventory. Merchandising company sell goods but service company provide service.

Income statement of merchandising company and Service company have following difference.

Cost of goods sold

First difference between income statement of both is that merchandising company prepare an account called "Cost of goods sold". While service company does not prepare such type of accounts. For merchandising company cost of goods sold is an expense account that include cost of purchasing the inventory and shipping it to location for selling to customers.

Operating expenses

Under service company income statement do not distinguish between operating expenses and non operating expenses. However merchandising company income statement separates expenses on the basis of operating and non operating.

Net income

service income statement arrive at net income before taxes and after expenses, however merchandising statement must account for non operating income and expenses. Any revenue such as interest from loan given to client will added back in and any expenses such as interest payment will be subtracted back out. This new total is the net income before tax for merchandising company.