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Week 3: Merchandising Operations and Inventory - Discussion

Merchandising Operations and Income Statements (graded)

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.
How is the income statement of a merchandising company different from that of a service company?

Responses

Responses are listed below in the following order: response, author and the date and time the response is posted.

Response / Author / Date/Time
Welcome to week 3 threaded discussions! / Professor Wilson / 3/10/2013 11:02:39 AM
Class,
Welcome to week 3 discussions. To get the week started, please consider the following:
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.
How is the income statement of a merchandising company different from that of a service company?
Prof Wilson
RE: Welcome to week 3 threaded discussions! / Geri Waldbillig / 3/17/2013 12:28:18 PM
Balance Sheet Differences
"Because merchandising companies and service companies sell different things, they also have some balance sheet differences. The balance sheet lists all of the company's assets, liabilities and equity. Both types of company will still maintain these sections. However, there is one main difference in the accounts listed. This difference is found in the asset section. Merchandising companies will have an asset for inventory, whereas service companies do not. This is listed as a current asset. Other differences can include the types of accounts payable a merchandising company has. For example, a merchandising company may have a standing account payable to a wholesale company for the purchase of its products. A service company may have a service revenue receivable account for expected payment for services provided."
Otis, Mallory. Difference Between Balance Sheet of a Merchandising Company and Service Company. Smallbusiness.chron.com. Retrived March 17, 2013 from http://smallbusiness.chron.com/difference-between-balance-sheet-merchandising-company-service-company-14649.html
RE: Welcome to week 3 threaded discussions! / Zach Monroe / 3/17/2013 3:22:42 PM
One of the key differences between a service company income statement and a merchandising company income statement is that the merchandising company, because they are selling buying and selling goods, will have a Cost of Goods Sold section and a service company will not. Additionally, the Cost of Goods Sold on the merchandising company multiple-step income statement must be subtracted from Net Sales, resulting in Gross Profit. Essentially, it cost the merchandising company a certain amount to procure the goods that were sold, i.e. the Cost of Goods Sold, and they sold those goods for a certain amount, i.e. the amount in Net Sales, which provides the amount profited or Gross Profit. Because service companies aren't dealing with goods, they do not need to calculate Gross Profit on the income statement.
RE: Welcome to week 3 threaded discussions! / Rachid Khalfaoui / 3/17/2013 7:16:13 PM
Hi Pr Wilson and class,
A service company is an organization that doesn't sell goods to make money, It provide services that clients want. Companies like investment banking, insurance, consulting, accounting and advisory and financial planning are service companies. In their financial statements we find words like service revenues, cost of services, service marketing or reorganization of service costs.
When a business uses to sell products it’s a merchandise company. It’s a long chain of activities starting by purchasing products, inventorying them, displaying them on the shelves, selling them and ending by ensuring customer service. In their financial statements we find words as sales revenue, product rebates, cost of goods sold, storage, shipping and hazardous material insurance.
So the main difference between them is the presence of the inventory. In merchandising income statement’s company we find an account called "cost of goods sold," while the other one does not.
Source: http://smallbusiness.chron.com/difference-income-statements-service-company-vs-merchandising-company-25928.html
Rachid
RE: Welcome to week 3 threaded discussions! / Darnell Flax / 3/17/2013 8:38:27 PM
The income statements will be different because a merchandising company sells merchandise where as a service company gives service. you may be able to buy and sell a product where you may need cost of goods sold in a service company you are giving a service so it will be seen as service revenue.
RE: Welcome to week 3 threaded discussions! / David Neville / 3/18/2013 8:52:16 AM
A mechandising company sells a physicalgood so the income statement needs to show the financial activity within the inventory where asa service company does not because they only sell an action, not a actual good.
RE: Welcome to week 3 threaded discussions! / Jessica Dallek / 3/18/2013 9:28:38 AM
Good morning Prof Wilson and Class,
A merchandising company has cost of goods and gross profit on their income statement and a service company does not have those two components. This is because a merchandising company has inventory or goods on hand and a service company does not have inventory or goods on hand. For example, I purchase office supplies through OfficeMax. OfficeMax has inventory or goods on hand such as copy paper, staples, and printer cartridges. I use Pitney Bowes for my postage needs. I do not buy physical stamps, but Pitney Bowes provides a service to me and receives revenue from customers like me by providing the service of paying for online postage.
I found the same article as Rachid I think, when I Googled a more in depth explanation of the comparison of Income Statements between the two types of companies:
http://smallbusiness.chron.com/difference-merchandise-service-income-statements-24928.html
RE: Welcome to week 3 threaded discussions! / Vi Nguyen / 3/18/2013 2:34:58 PM
The merchandising company income statement uses the multi-step income statement. It includes gross profit, income from operation and net income. Gross profit is included because merchandising companies operate on profit by buying and selling goods. A service company operate on completing services that they sell to customers like servicing cars for maintenance reason. They don't have a gross profit because no tangible items are being exchanged.
RE: Welcome to week 3 threaded discussions! / Elizabeth Smith / 3/18/2013 5:05:20 PM
Merchandising company purchases items at wholesale, these items are assets. Then they sell the items at retail value to create income.
Service Company sells their services not necessarily merchandise or items. A good example of a service company is Jiffy Lube, selling a service to change your oil and inspect your engine.
The difference would be the account sheet. Merchandising companies would have a larger inventory sheet verse a service company like Jiffy Lube.
http://smallbusiness.chron.com/difference-between-balance-sheet-merchandising-company-service-company-14649.html
RE: Welcome to week 3 threaded discussions! / Professor Wilson / 3/18/2013 5:36:45 PM
Elizabeth, et al (and rest of the class),
Thanks for the posting and discussion on differences b/t service company and merchandising company's income statements. Good work on laying out the differences.
Let's continue this topic by providing examples of what service company I/S looks like and providing examples of what merchandising company I/S looks like.
Be specific an note the specific lineitems are needed.
Prof Wilson
RE: Welcome to week 3 threaded discussions! / Kelly Stewart / 3/18/2013 8:48:00 PM
example of a merchanise companys income statement:
http://0.tqn.com/d/artsandcrafts/1/0/W/0/-/-/incomestatement2.jpg
example of a service companys income statement:
http://0.tqn.com/d/artsandcrafts/1/0/X/0/-/-/incomestatement3.jpg
Here are some typical examples of what would commonly be seen as entries on an income statement for a merchandising company:
Freight:
freight-out 300
Cash
300
Inventory 300
Cash
300
Returns:
Accounts payable 500
Inventory
500
Discounts (ex 3%)
Accounts Payable 1000
Inventory
30
Cash
970
On Account purchases:
Cost of goods sold 350
Inventory
350
RE: Welcome to week 3 threaded discussions! / Rachid Khalfaoui / 3/19/2013 1:28:23 PM
Hi Pr Wilson and class,
Here is in attachment a detailed sample of income statement’s merchandising company. The main components are: net sales, cost of good sold, gross profit and total expenses. The successive steps of calculation are:
Net sales = Gross sales - Goods returned
Cost of good sold = beginning inventory + all fees
Gross profit = Net sales – Cost of goods sold
Total expenses = gross profit – Total general & administrative expenses
And Net income = Net sales – Total expenses
The fees include purchase, freight in, and storage and general & administrative expenses include rent, wages and utilities.
Source:http://artsandcrafts.about.com/od/accountingandpricing/ss/incomestatement_4.htm
Rachid
RE: Welcome to week 3 threaded discussions! / Rachid Khalfaoui / 3/19/2013 1:31:28 PM
Hi Pr Wilson and class,
Sorry I forgot to attach the income statement file. Here it is.
Rachid
incomestatement4.jpg
RE: Welcome to week 3 threaded discussions! / Jessica Dallek / 3/19/2013 2:36:53 PM
An income statement for a service company could look like the single-step income statements that we have been studying thus far. It would show all the revenues and expenses to give us a net income Since their is no goods sold, there would not be gross profit. An income statement for a merchandising company could be a multi-step income statement that further breaks downs net sales and types of revenues. It would include Gross profit, Operating income, Non-operating activity income, and then net income.
RE: Welcome to week 3 threaded discussions! / Geri Waldbillig / 3/19/2013 4:04:55 PM
Income statementfor service company and merchandising company is attached.
Service and Merchandising inc statements 031913.doc
Example of Merchandisng company I/S / Vi Nguyen / 3/19/2013 4:22:36 PM
Here is example of merchandising company I/S look like:http://0.tqn.com/d/artsandcrafts/1/0/Y/0/-/-/incomestatement4.jpg
RE: Example of Service company I/S / Vi Nguyen / 3/19/2013 4:24:14 PM
And here is Service company I/S:
RE: Welcome to week 3 threaded discussions! / Darnell Flax / 3/19/2013 11:37:27 PM
Source: http://0.tqn.com/d/artsandcrafts/1/0/Y/0/-/-/incomestatement4.jpg
Source: http://www.computer-accounting-software-help.com/Example_Income_Statement.html
Here are Two examples one of Merchandise Income Statement and Service Income Statement as you can see merchandise Income statement has the cost of goods sold where as the other does not have that section because they give a service rather than selling goods that they buy or made.....
RE: Welcome to week 3 threaded discussions! / Elizabeth Smith / 3/20/2013 1:51:10 PM
Service Company Income Statement will list the “Service Revenue” the service one provides. For example, a lawyer’s office
So the Statement would similar to this:
Lawyer service $10,000
General Admin Exp
Office supplies 200
Rent 500
Utility 200
Total 900
NET Income $9,100
http://artsandcrafts.about.com/od/accountingandpricing/ss/incomestatement_3.htm
Merchandise Company Income Statement will list the Sales, Inventory and Cost of Goods Sold. Here’s an example that will be in the Merchandise Company Incomes Statement but not in the Service Company Income Statement
Gross sales $10,000
Less returns 500
Net Sales 9,500
Cost of Goods sold
Beginning INV 3000
Purchase 500
Freight-IN 300
Storage 100
Goods Available for Sale 3900
Less ending INV 1000
Cost of goods sold 2900
Gross profit 6600
http://artsandcrafts.about.com/od/accountingandpricing/ss/incomestatement_4.htm
RE: Welcome to week 3 threaded discussions! / Karla Craig / 3/20/2013 10:52:03 PM
the samples of the service income statment and the merchandising income statement are attached
Exhibit_44-7.jpg , Exhibit_44-8.jpg
RE: Welcome to week 3 threaded discussions! / Kimberly Warren / 3/21/2013 5:43:53 PM
Beginning assets minus sold inventory equals the ending assets .
RE: Welcome to week 3 threaded discussions! / Tia Miller / 3/23/2013 4:50:06 PM
A merchandising company income statement is different from a service company income statement due to the fact the merchandising company derives most of its revenue from the sales of merchandise. It includes cost of goods sold and selling expenses. Service companies derive most revenues from providing services and investment-related income.
Very goodexamples that shows the differencebetween a Merchandising and Service Company income statement are attached.
merchandising income statement..jpg , service company income statement.jpg
RE: Welcome to week 3 threaded discussions! / Kelly Stewart / 3/18/2013 8:25:55 PM
"The primary difference between a merchandising and a service-based business is the presence of inventory. Merchandising businesses sell goods to customer, whereas service-based businesses do not. The companies' financial statements, including the income statements, must reflect this difference."
http://smallbusiness.chron.com/difference-merchandise-service-income-statements-24928.html
Merchandising companies differ greatly from service companies when it comes to recording income. When measuring income of a merchandising company, cost of goods sold and gross profit are taken into account; this is not the case with service companies. Service companies record profits/income as service revenue. However, for merchandising businesses much more is taken into account to determine income such as inventory, freight, returns, discounts, costs of goods sold, gross profits, taxes, etc. Basically any cost related to the selling of merchandise.
RE: Welcome to week 3 threaded discussions! / Kaswelda Carter / 3/18/2013 9:01:35 PM
A service company that doesn't sell goods to make money. They rely on the personnel of the company to provide services that clients want. Service company's income statement is the items that are seen such as revenue, cost of services, sales and marketing.
Merchandising consists of methods and tactics a business was to sell products or provide services to retail customers. Merchandising engage in a chain of events.
RE: Welcome to week 3 threaded discussions! / Stacy Davis-Green / 3/18/2013 9:21:05 PM
The income statement of a merchandising company is very different from a service company, in that inventory is not shown on a service company income statement. Merchandising companies are known for selling goods, while servicing companies provide a service. On the merchandising income statement , one will find revenue, cost of goods, and administrative expenses. On the servicing income statement, one will find service revenue minus any expense related to that service.
RE: Welcome to week 3 threaded discussions! / Stacy Davis-Green / 3/18/2013 9:35:57 PM
Modified:3/18/2013 10:10 PM
The income statement of a merchandising company is very different from a service company, in that inventory is not shown on a service company income statement. Merchandising companies are known for selling goods, while servicing companies provide a service. On the merchandising income statement , one will find revenue, cost of goods, and administrative expenses. On the servicing income statement, one will find service revenue minus any expense related to that service. An Example of a merchandising company is a department store, and examples of businesses that are servicing companies are insurance companies, consulting companies, financial planning companies, any business that provides a service.