The major difference in the statement of retained earnings between a service business and a
Merchandising business is
A. that the retained earnings statement of a merchandising business includes dividends.
B. that the retained earnings statement of a merchandising business shows the cost of goods sold.
C. that the retained earnings statement of a service business includes dividends.
D. nothing. There are no differences between the two.
To determine the major difference in the statement of retained earnings between a service business and a merchandising business, we need to understand the components of a retained earnings statement for each type of business.
The retained earnings statement summarizes the changes in retained earnings over a specific period, usually a fiscal year, and is based on the net income or loss of the business, dividends paid to shareholders, and any prior period adjustments.
A service business provides services to customers, while a merchandising business engages in buying and selling products. The major difference between the two in terms of the statement of retained earnings is the treatment of the cost of goods sold (COGS) and dividends.
In a service business, the primary source of income is generated from providing services, and there is typically no cost of goods sold. Therefore, the retained earnings statement of a service business does not include the cost of goods sold.
On the other hand, a merchandising business buys goods from suppliers and sells them to customers. The cost of the goods sold is a significant expense in this type of business. Thus, the retained earnings statement of a merchandising business includes the cost of goods sold as an expense.
Based on this information, the correct answer would be B. The major difference in the statement of retained earnings between a service business and a merchandising business is that the retained earnings statement of a merchandising business shows the cost of goods sold.