Question

How are the components of revenues and expenses different for a merchandising company? Explain the income measurement process of a merchandising company.

Answer 1

• There are several differences in the components of revenues and expenses for a merchandising company and a manufacturing company.
• Most of them are highlighted below:
  

Manufacturing Company	Merchandising Company
Basics: These are engaged manufacturing. They purchase material, turn it into a finished products, and then sell.	Basics: These are engaged in buying and selling. They buy the product, and then sell it to customers.
Components of Revenues:	Components of Revenues:
Sales Revenue	Sales Revenue
Sales of Scrap
Internal Transfer revenue
Components of Expenses:	Components of Expenses:
Cost of Goods Sold include material cost, labor cost and factory overhead cost	Cost of Goods Sold includes cost of net purchases
Factory Rent	No existance of 'factories' for these.
Factory Insurance	Hence, no factories related expenses.
Factory Equipment depreciation

• Income measurement process of merchandising company.

--Goods are purchased to be sold later on.
--Purchase cost including Freight paid is added to the cost of inventory purchased.
--Purchase discount, return & allowances are deducted from cost of purchase.
--Sales are made, and Sales discount and returns are adjusted to find Net Sales.
--The Cost of Goods Sold is reduced from Net Sales to find Gross Profits.
--Other administrative and selling expenses are reduced from Gross Profits to find the Net Income.