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Differences between merchandising amd service businesses

Compare and contrast service and merchandising businesses. What accounts would be found in a merchandising business, but not in a service business. How do the financial statements differ?

Solution Preview

The major differences between a business that sells products as opposed to a business that sells service are:

1. inventory asset
2. cost of good sold expense
3. classified income statement
4. inventory financing
5. accrual basis of accounting is required for product sales

1. In merchandising, the inventory asset will represent a substantial account on the balance sheet. That account won't be there for a service business unless the service include product install (contracts or a package deal of some kind). For readers of financial statements, certain ratio analysis would be impacted with no inventory account, and comparability to companies in service might be meaningless.

2. The calculation for the cost of goods sold section of the income ...

Solution Summary

The solution provides a list of five ways in which merchandising businesses are different from service businesses. Each of the five includes a paragraph of explanation.

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