What items appear in financial statements of merchandising companies that do not appear in the financial statements of service companies? Why is there a difference?
The financial statements of merchandising companies and service companies differ primarily in the items that are reported. The key items that appear in the financial statements of merchandising companies but not in service companies are inventory and cost of goods sold (COGS).
1. Inventory: Merchandising companies purchase goods for resale to customers. As a result, they need to account for the value of their inventory, which consists of the items they have purchased but not yet sold. Inventory is reported as an asset on the balance sheet of a merchandising company. Service companies, on the other hand, do not have physical goods for sale, so they do not have an inventory account on their financial statements.
2. Cost of Goods Sold (COGS): COGS represents the cost incurred by a merchandising company to acquire or produce the goods it sold during a specific period. It includes the cost of purchasing or manufacturing the goods, as well as any additional costs directly related to getting the goods ready for sale (e.g., transportation costs). COGS is reported as an expense on the income statement of a merchandising company. Service companies typically do not have COGS because their primary revenue comes from providing services rather than selling goods.
The difference between the financial statements of merchandising and service companies arises due to the nature of their business operations. Merchandising companies engage in buying and selling physical goods, so they need to track their inventory and account for the costs incurred in acquiring those goods. Service companies, on the other hand, provide intangible services that do not involve physical goods, so they do not have inventory or COGS.