Answered: How are a merchandiser's inventories…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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How are a merchandiser's inventories different from the inventories of a service-oriented firm

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Merchandiser’s inventories different from the inventories of a service-oriented firm:-

The main difference between a merchandising company and a service industry company is that the merchandising company must stock inventory. This becomes important when setting up the accounting for the business. Cost of Goods Sold is needed for a business that sells merchandise, but not necessarily for a business that offers services.
Core difference between manufacturing and merchandising. A successful manufacturing business features expertise in developing an operation that produces high-quality, efficient or high-value goods and then distributing them. A merchandiser owns strengths in acquiring goods, increasing their value and marketing them to buyers. A distributor buys items and then resells to retailers, consumers or business buyers. A retailer buys goods and then resells to consumers.
One major difference between service companies and the other two types is that service companies do not have the cost of goods sold because there is no product being sold. Service firms also do not have inventory, also because no physical product is being sold. There may be direct costs associated with providing the service, but no physical product.
Merchandising companies purchase inventory (an asset) and sell that inventory. When inventory is sold, the asset is considered used up, and the cost of that inventory is transferred from the balance sheet to the income statement as an expense. This expense is called cost of goods sold. For merchandising companies, the inventory account can also be referred to as merchandise inventory.
Manufacturers, production inventory includes raw materials used in producing finished goods. Low costs and efficient use of raw inventory is key in manufacturing profitability. Once raw materials are converted, the manufacturer possesses a finished-goods inventory. A reseller buys finished goods and either holds its new inventory in a distribution center or in storage areas in stores. When floor inventory or merchandise grows low, stock is replenished by retail associates.
A merchandising business sells goods, also known as merchandise. Good examples of merchandising businesses include retail clothing, grocery stores and bookstores. Some businesses produce the goods they sell, while other merchandise businesses buy and sell goods they've purchased wholesale. Or it could be a combination of the two.
A service business provides services to its customers. Nail salons, accountants, law firms and cleaning services are examples of service businesses. Some service businesses also sell products – for example, a nail salon sells nail polish – but for the most part, the bulk of the business income comes from providing the service.

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