Chapter 5, Problem 1DQ

To determine

Concept Introduction: Business can be of various types but broadly they are categorized in two types. The one who undertake sale the goods are knows as manufacturing or trading businesses and the one who provide the services are known as service industry.

To identify: The items that will appear in the financial statements of merchandising company but not in the statements of service companies.

Explanation of Solution

The businesses can be different so as to their components of financial statements. The businesses can be of three different kinds. These are manufacturing, trading and the service industry.

Manufacturing industry is the business which is engaged in the production of goods. Trading industry is engaged in the selling of products already manufactured by someone and service industry is that business which is involved in providing services on the basis of their knowledge and know-how.

The following are the items that will appear in the financial statements of merchandising companies but not in the statements of service companies:

a) Cost of goods sold – Cost of goods sold is reported in the income statement of merchandising company. Since no goods are involved in the service industries, it will not be there in their income statement.

b) Purchase cost of material - Since no goods are involved in service industries. Hence, it will not be there in the income statement of service industry.

c) Changes in inventories - Since no goods are involved in service industries. Hence, it will not be there in the income statement of service industry.

d) Inventory – Value of inventory in hand is reported in the balance sheet of merchandising companies but not in the balance sheet of service industry.