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?

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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.

What is the purpose of a Balance Sheet? What information does it provide?

The balance sheet is a picture of the company’s assets, liabilities, and stockholders’ equity at a specific point in time. The balance sheet helps in determining important information to the stakeholders of an organization. In the book Financial Accounting Tools for Business Decision Making, Kimmel shows the importance by explaining solvency, liquidity, and profitability. Kimmel defines a company’s solvency as, “The ability to pay interest as it comes due and to repay the balance of a debt due at its maturity” (Kimmel, 2011). He goes on to define liquidity as, “The ability to pay obligations expected to become due within the next year or operating cycle” (Kimmel, 2011).

Determining the profitability of a company for comparative analysis is difficult without knowing the net income which is found on the income statement and the average number of common stock shares outstanding. The balance sheet’s purpose in determining profitability is to provide the value of what the common stock is worth at a specific point in time.

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

What is the purpose of a Balance Sheet? What information does it provide?

I agree that the balance sheet informes stakeholders as to the position of the company's debts vs. assets. Business decision makers utilize the balance sheet to determin the value of a corporation. The actual "bottom line" often referred to in the business culture today is the net income or net loss which are found on the income statment. Stackholders want to know how profitable a decision in a company will be, thus how much drops to the "bottom line" of the income statment. The balance sheet is an overall snapshot of the tangible net worth of a corporation. http://www.investopedia.com/terms/b/balancesheet.asp#axzz1u1VMJqKL  This link is to investopedia and provides more information on the purpose of a balance sheet.

Financial Accounting Tools for Business Decision Making

One thing I find interesting about the primary financial statements published by a corporation are how the statements inter-relate. The classification cash used in a balance sheet appears on the statement of cash flows and should be the cash at the bottom of the statement of cash flows. The numbers from the different financial statements provide the story as to how the company is positioned financially and tells us the story of the overall company performance. In the book Financial Accounting Tools for Business Decision Making, Kimmel states, “The debt to total asset ratio is one source of information about long-term debt-paying ability.

It measures the percentage of total financing provided by creditors rather than stockholders… Thus, the higher the percentage of debt financing, the riskier the company” (Kimmel, 2011). This debt to total asset ratio information is only 1 part of the financial picture. What if a company was highly leveraged but was still profitable. Take property management for instance. What if the asset would be profitable even if it was 100% leveraged. Risky? Maybe, but without all the financial statements to determine profitability the business owner would never take that risk. Often times real-estate companies are highly leveraged and still highly profitable. In my opinion not having any equity is an insane decision. Kimmel, P., Weygandt, J. & Kieso, D. (2011). Financial accounting tools for business decision making. Danvers, MA: John Wiley & Sons, Inc.

How is cash-basis accounting different from accrual-basis accounting?

Cash-basis accounting is very different from accrual-basis accounting. One major difference is when the business records revenues and expenses. Cash accounting is used more by very small businesses. These businesses recognize revenues when the business receives cash and recognizes expenses when cash is paid out. In accrual-basis accounting revenues are recognized in the period the revenue is earned or accrued. The expenses are matched to the period in which they help to generate the revenue earned or the expense is actually accrued. Kimmel in his book Financial Accounting Tools for Business Decision Making explains accrued revenues as, “revenues earned but not yet recorded at the statement date” (Kimmel, 2011). He goes on to explain that, “An adjusting entry for accrued revenues results in an increase (a debit_ to an asset account and an increase (a credit) to a revenue account” (Kimmel, 2011). Accrual accounting principles are Generally Accepted Accounting Principal (GAAP). Accrual-basis accounting is the way most U.S businesses record the economic events of the company.

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