Difference in Merchandise & Service Income Statements
by Christine Aldridge, Demand Media
The primary difference between a merchandising and a service-based business is the presence of inventory. Merchandising businesses sell goods to customer, whereas service-based businesses do not. The companies' financial statements, including the income statements, must reflect this difference.
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Cost of Goods Sold
When you review a service income statement while simultaneously viewing a merchandising income statement, the first difference you'll notice is that the latter carries an account called "cost of goods sold," while the former does not. Service-based businesses don't carry inventory and therefore don't use this account. For a merchandising company, cost of goods sold is an expense account that refers to the cost of purchasing the inventory and shipping it to the appropriate locations for selling to customers.
Calculating Cost of Goods Sold
To calculate cost of goods sold in a merchandising company, calculate the beginning inventory and purchases throughout the year, then subtract the ending inventory. The beginning inventory is the amount that's present on the previous year's income statement, while ending inventory is the amount available for sale as of the date of the current year's income statement. Purchases include any shipping costs that you incur from the manufacturer or distributor. Cost of goods sold is usually one of the greatest expenses that a merchandising company incurs and one of the most important accounts on the income statement.
Calculating Net Income
The main purpose of the income statement is to list a company's revenues and expenses, and to present the net income of a business for the year. In both types of income statements, net income is simply the revenues, or sales, of the company...