Chapter 5, Problem 1Q

(a)

To determine

Accounting cycle: The accounting cycle refers to the process of recording and summarizing the financial events of a business. It operates in the form of a cycle, with the steps of accounting activities followed in a cyclical order. The cyclical order starts at the beginning of a transaction, until the time when financial results are derived subsequent to the preparation of the final accounts at the end of the accounting year.

To determine: Whether the steps in the accounting cycle for a merchandising company are different from the accounting cycle for a service company or not.

Explanation of Solution

The accounting cycle of a merchandising company is quite different from the accounting cycle of a service company. In a merchandising company, the process of purchasing merchandise inventory and the final process of selling extends the time period of the cycle. This may lead to a need for making quantity records for all purchases and sales. However, this is not true in the case of a service company.

A merchandising company undergoes more steps in the process of accounting. It is involved in selling products. So, the company is ought to take into consideration sales, including sales returns and allowances, and sales discounts.  It would also have to consider purchases, including purchase returns and allowances and purchase discounts. The company would also have to consider ending inventory and cost of goods sold to evaluate the net profit. In a service company, the net profit is determined with the help of service revenue and operating expenses.

A service company provides services to its customers. This indicates that there would be no effect of sales, purchases, and cost of goods sold. The bulk of costs would involve labor costs.

The adjusting entries for a merchandising company would usually be the same as a service company. However it involves an additional adjustment to match the records with actual inventory on hand. It also involves cost of goods sold and merchandising inventor.

Conclusion

Hence, it is agreeable that the steps in the accounting cycle for a merchandising company are different from the accounting cycle for a service company or not.

(b)

To determine

Whether the measurement of net income for a merchandising company is the same as that of a service company.

Explanation of Solution

The method of computing the net income in a merchandising company is different when compared to the method of computing the net income in a service company.

In a merchandising company, the net income is calculated as below.

Particulars	Amount ($)	Amount ($)
Sales revenue		xxx
Less: Cost of goods sold		xxx
Gross profit		xxx
Less: Operating expenses		xxx
Selling expenses	xxx
Administrative and general expenses	xxx
Total operating expenses		xxx
Net income		xxx

Table (1)

In a service company, the net income is calculated below.

Particulars	Amount ($)	Amount ($)
Service revenue		xxx
Operating expenses:
Salary expenses	xxx
Depreciation expenses	xxx
Income tax expenses	xxx
Net income		xxx

Table (2)

Conclusion

Hence, it can be concluded from Table (1) and Table (2) that the measurement of net income for a merchandising company is different from that of a service company.