Question

how does the income statement prepared for a company that sells goods (merchandiser) differ from that prepared for a service business?

Answer 1

The income statement of a merchandising company is different from the income statement of a service company because it is a multiple-step income statement and it shows the gross profit, income from operations, and the net income of the merchandising company.

A service company would not have to report any cost of goods sold which helps determine the gross profit of a merchandising company. The income statement of a manufacturing company is identical to that of a merchandising company. The difference between the two types of companies lies in the Determination of cost of goods sold.

The primary difference between a merchandising and a service-based business is the presence of inventory. Merchandising businesses sell goods to customer, whereas services-based businesses do not.

The companies's financial statements, including the income statements, must reflect this difference.

Cost of Goods Sold

When you review a service income statement while simultaneously viewing a merchandising income statement, the first difference you'll notice is that the latter carries an account called "cost of goods sold," while the former does not. Service-based businesses don't carry inventory and therefore don't use this account. For a merchandising company, cost of goods sold is an expense account that refers to the cost of purchasing the inventory and shipping it to the appropriate locations for selling to customers.

Calculating Cost of Goods Sold

To calculate cost of goods sold in a merchandising company, calculate the beginning inventory and purchases throughout the year, then subtract the ending inventory. The beginning inventory is the amount that's present on the previous year's income statement, while ending inventory is the amount available for sale as of the date of the current year's income statement. Purchases include any shipping costs that you incur from the manufacturer or distributor. Cost of goods sold is usually one of the greatest expenses that a merchandising company incurs and one of the most important accounts on the income statement.

Calculating Net Income

The main purpose of the income statement is to list a company's revenues and expenses, and to present the net income of a business for the year. In both types of income statements, net income is simply the revenues, or sales, of the company minus all operating expenses. A service-based business will usually experience a decline in net income largely due to a decline in revenue, rather than an increase in expenses. In a merchandising company, a decrease in net income is just as likely to occur because of an increase in expenses as a decrease in revenues. The income statements of both types of companies help to pinpoint which area the company needs to focus on.

Manufacturing Income Statement

The income statement from a manufacturing company closely resembles that of the merchandising company, however there are a few added expenses. Cost of goods sold for a manufacturing company is much more complex as the company must take into account the cost of raw materials, labour and overhead that creates the finished goods. Some companies choose to present all of this information on their income statements, while others only present it as a final total for cost of goods sold.