Multiple Choice
What is the primary difference between a merchant wholesaler and an agent in the context of merchandising companies?
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4. Merchandising Operations
Service Company vs. Merchandising Company
Struggling with Financial Accounting?
Join thousands of students who trust us to help them ace their exams!Watch the first videoMultiple Choice
Which of the following is true for a service company?
A
It records purchases of merchandise as inventory.
B
It earns revenue primarily from the sale of physical goods.
C
It does not maintain inventory on its balance sheet.
D
Its cost of goods sold is typically the largest expense.
Verified step by step guidance1
Understand the nature of a service company: A service company primarily earns revenue by providing services rather than selling physical goods. This distinction is key to answering the question.
Review the concept of inventory: Inventory refers to goods held for sale in the ordinary course of business. Service companies typically do not sell physical goods, so they do not maintain inventory on their balance sheet.
Analyze the cost of goods sold (COGS): COGS is associated with the cost of inventory sold. Since service companies do not sell physical goods, they generally do not have COGS as their largest expense. Instead, their largest expense is often related to salaries or operational costs.
Evaluate the statement about merchandise purchases: Service companies do not record purchases of merchandise as inventory because they do not deal with physical goods for resale.
Confirm the correct answer: Based on the above analysis, the correct statement is 'It does not maintain inventory on its balance sheet,' as this aligns with the nature of service companies.
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