How is the income statement of a merchandising company different from that of a service company?

The income statement of a merchandising company is different from the income statement of a service company because it is a multiple-step income statement and it shows the gross profit, income from operations, and the net income of the merchandising company.  A service company would not have to report any cost of goods sold which helps determine the gross profit of a merchandising company.

Before I entered the world of property management and financial services I worked for a nut, dried fruit, and candy wholesaler supplier. One of the major goals of the president was to drive down his cost of goods sold. He was always happy when he could order larger quantities of his goods or work a yearly purchase agreement to guarantee a certain quantity discount to get his “goods” at a better price. I remember looking over the income statement every month because my bonus was based on the price at which I could sell the product to my retailers less the cost of goods sold, or the gross profit. According to Kimmel (2011) in his book Financial Accounting Tools for Business Decision Making he states, “A merchandising company has two categories of expenses: the cost of goods sold and operating expense” (2011). Merchandising companies must detail those expense categories on their income statement while service companies do not.  

Kimmel, P., Weygandt, J. & Kieso, D. (2011). Financial accounting tools for business decision making. Danvers, MA: John Wiley & Sons, Inc.

what accounting is?

www.inbeefinancial.com

In my opinion accounting is the documentation of a company’s activities. It provides a look into the past, present and future of a company. Because I own a commercial finance corporation, I work with all different kinds of small business owners. It is truly surprising to see the lack of accounting knowledge that many of the business owners do not possess. Many business owners think that because they have an idea that they should be able to raise capital for their business. If they knew more about accounting they would be more prepared to present their opportunity to me. A lot of times I have to take bank statements and prepare an income statement, statement of cash flows, and a balance sheet for them. I often catch mistakes that business owners are making on their financial statements that they prepare themselves. The accounting of a business affects all stakeholders. In the book Financial Accounting Tools for Business Decision Making, I noticed that accounting is not just a business function but also a personal tool. The book states, “Accounting provides internal reports, such as financial comparisons of operating alternatives, projections of income from new sales campaigns, and forecasts of cash needs for the next year” (Kimmel, 2011). This got me thinking about my personal finances and all the “internal users” involved. Having the tools and reports to make decisions reduces arguments and provides a realistic framework for family decisions.

Kimmel, P., Weygandt, J. & Kieso, D. (2011). Financial accounting tools for business decision making. Danvers, MA: John Wiley & Sons,Inc.

Financial Reporting Environment and GAAP

I really like the word stewardship because it implies the ethical, moral actions, and decisions that managers of money must undertake in the business setting. In making business decisions it is improtant to be a good steward of the funds you invest, save, raise, or borrow. I believe that accounting makes it possible to make those informed decisions and be a good steward of funds. A company without good accounting procedures is going to be making decisions without the proper analysis tools. It would become eaiser to lose money without identifing problems, recording trasanctions, classifying the proper information and understanding the economic activities of the company.