Skip to main content
Pearson+ LogoPearson+ Logo

Service Company vs. Merchandising Company quiz #1 Flashcards

Service Company vs. Merchandising Company quiz #1
Control buttons has been changed to "navigation" mode.
1/24
  • What is the primary difference between a service company and a merchandising company?
    A service company provides intangible services, while a merchandising company sells tangible goods.
  • When does a service company recognize revenue according to the revenue recognition principle?
    A service company recognizes revenue when the service is performed, regardless of when cash is received.
  • What journal entry does a service company make when it performs a service on account?
    The company debits accounts receivable and credits service revenue.
  • How does a merchandising company recognize revenue?
    A merchandising company recognizes revenue when it delivers goods to the customer.
  • What are the two journal entries a merchandising company makes when a sale is made?
    One entry records the revenue (debit cash/accounts receivable, credit sales revenue), and the other records the cost of goods sold (debit COGS, credit inventory).
  • What is the purpose of the cost of goods sold (COGS) entry in a merchandising company?
    COGS records the expense related to the goods sold, matching the cost with the revenue earned.
  • How does the matching principle apply to merchandising companies?
    The matching principle requires that the expense of goods sold (COGS) is recorded in the same period as the related revenue.
  • What accounts are affected on the balance sheet when a service company performs a service on account?
    Accounts receivable (asset) increases and equity (via revenue) increases.
  • What accounts are affected on the balance sheet when a merchandising company sells inventory for cash?
    Cash (asset) increases, inventory (asset) decreases, and equity changes due to revenue and COGS.
  • Why does a merchandising company need to make two journal entries for each sale?
    Because it must record both the revenue from the sale and the expense of the inventory sold.
  • Give an example of a service company and a merchandising company.
    A tutoring company is a service company; a clothing store is a merchandising company.
  • What is recognized as revenue for a service company?
    Revenue is recognized when the service is completed, not when cash is received.
  • What is recognized as revenue for a merchandising company?
    Revenue is recognized when goods are delivered to the customer.
  • How does the sale of goods affect the inventory account in a merchandising company?
    Inventory is credited (decreased) by the cost of the goods sold.
  • What is the main expense account used by merchandising companies when recording sales?
    Cost of Goods Sold (COGS) is the main expense account.
  • How does a service company’s revenue recognition differ from a merchandising company’s?
    A service company recognizes revenue when the service is performed; a merchandising company recognizes revenue when goods are delivered.
  • What happens to equity when a service company earns revenue?
    Equity increases due to the increase in revenue.
  • What happens to equity when a merchandising company sells goods?
    Equity increases from sales revenue and decreases from COGS, with the net effect being the gross profit.
  • If a customer buys goods on account from a merchandising company, what is the journal entry for the revenue side?
    Debit accounts receivable and credit sales revenue.
  • If a customer buys goods on account from a merchandising company, what is the journal entry for the cost side?
    Debit cost of goods sold and credit inventory.
  • Why is there no cost of goods sold entry in a service company’s journal entries?
    Because service companies do not sell physical goods, so there is no inventory to account for.
  • How does the accounting equation remain balanced in a merchandising company after a sale?
    Assets increase (cash/accounts receivable), assets decrease (inventory), and equity increases (net of revenue and COGS).
  • What is the effect on assets and equity when a service company performs a service on account?
    Assets (accounts receivable) and equity (revenue) both increase by the amount earned.
  • What is the effect on assets and equity when a merchandising company sells inventory for cash?
    Assets increase by the cash received, assets decrease by the inventory sold, and equity increases by the gross profit (revenue minus COGS).