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.

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 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 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 inventory.

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)

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 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
Depreciation expenses	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.