Question

Describe the major differences between income statements for a service company and a merchandise company. In detail, describe how the gross margin for a merchandising company is determined.

Answer 1

The major differences between the income statements for a service company and a merchandise company are mentioned below:

-Service companies provide services whereas merchandise companies sell tangible goods. Thus, the concept of inventory does not exist for a service company. Thus, the head" cost of goods sold" does not appear in the income statement of a service company.

-While calculating the net income for a service company, the decline would be mainly due to a drop in revenue where as for a merchandise company , the decline could be both due to an increase in the cost of production as well as a decrease in revenue.

-The income statement of a service company is much simpler than the income statement of a merchandise company as the cost of goods sold is not involved . Cost of goods sold is a complex component beacuse of inventory valuation.

The gross margin of a merchandising company is arrived at in the following manner:

- The first line item is the sales revenue which is arrived at after deducting refunds or discounts.

-The second line item is the cost of goods sold which is calculated by adding beginning inventory and cost of inventory purchased and deducting ending inventory from it.

-The difference between sales revenue and cost of goods sold is the gross margin for a company.