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(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
Whether the steps in the accounting cycle for a merchandising company are different from the accounting cycle for a service company or not.
(a)
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Explanation of Solution
The steps in accounting cycle of a merchandising company is same as the accounting cycle of a service company. Both merchandising companies and service companies record similar transactions.
In a merchandising company, the process of purchasing merchandise inventory and the final process of selling extends the time period of the cycle. The steps include buying inventory, storing the inventory, selling the merchandise, and receiving the revenue.
A service company provides services to its customers. The steps include collecting deposits, perform services, and receive the revenue.
The
Hence, it is disagreeable that the steps in the accounting cycle for a merchandising company are similar to the accounting cycle for a service company.
(b)
Whether the measurement of net income for a merchandising company is the same as that of a service company.
(b)
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Explanation of Solution
The method of computing the net income in a merchandising company is similar to the method of computing the net income in a service company because in both the cases the expenses are deducted against revenues to compute net income.
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 same to a service company.
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Chapter 5 Solutions
Financial Accounting
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