Multiple Choice
One important difference between service companies and merchandising companies is that:
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4. Merchandising Operations
Service Company vs. Merchandising Company
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Which of the following do both service companies and merchandising companies typically have?
A
Raw materials used in production
B
Revenues and expenses reported on the income statement
C
Inventory accounts on the balance sheet
D
Cost of Goods Sold as a major expense
Verified step by step guidance1
Understand the nature of service companies and merchandising companies. Service companies provide intangible services and typically do not have inventory, while merchandising companies sell tangible goods and maintain inventory accounts.
Review the components of the income statement. Both service and merchandising companies report revenues (income earned from operations) and expenses (costs incurred during operations) on their income statements.
Analyze the inventory accounts. Merchandising companies maintain inventory accounts on the balance sheet, but service companies generally do not, as they do not sell physical goods.
Examine the Cost of Goods Sold (COGS). COGS is a major expense for merchandising companies because it represents the cost of inventory sold. Service companies typically do not have COGS since they do not sell physical goods.
Conclude that the commonality between service and merchandising companies is the reporting of revenues and expenses on the income statement, as this applies to both types of businesses regardless of their operational differences.
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