Multiple Choice
Which type of company is most likely to use job-order costing to track the costs of individual projects or batches?
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4. Merchandising Operations
Service Company vs. Merchandising Company
Struggling with Financial Accounting?
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Which of the following best describes a key difference between a service company, such as a carpet cleaning business, and a merchandising company?
A
A service company maintains inventory of goods for resale.
B
A merchandising company does not record cost of goods sold.
C
A merchandising company primarily generates revenue from service fees.
D
A service company earns revenue by providing intangible services rather than selling physical goods.
Verified step by step guidance1
Understand the key difference between a service company and a merchandising company. A service company earns revenue by providing intangible services, such as cleaning carpets, consulting, or repairs, whereas a merchandising company generates revenue by selling physical goods.
Recognize that a service company does not maintain inventory of goods for resale because it does not sell physical products. Instead, its focus is on delivering services.
Identify that a merchandising company does maintain inventory of goods for resale, as its primary business activity involves purchasing goods and selling them to customers.
Clarify that a merchandising company records cost of goods sold (COGS) as part of its financial statements, which represents the direct costs associated with the goods sold during a period. Service companies typically do not record COGS because they do not sell physical goods.
Conclude that the correct answer is: A service company earns revenue by providing intangible services rather than selling physical goods. This distinction highlights the fundamental difference in business operations between the two types of companies.
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