
(a)
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
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.
(a)

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

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 | |
|
xxx | |
Income tax expenses | xxx | |
Net income | xxx |
Table (2)
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.
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Chapter 5 Solutions
Accounting Principles 12th Edition
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