Chapter 5, Problem 1QC

Which account does a merchandiser use that a service company does not use?

Learning Objective 1

1. cost of Goods Sold
2. Merchandise Inventory
3. Sales Revenue
4. All of the above

To determine

A merchandiser is a person who purchases goods from the wholesale market and sells it to the retail market. The service company is engaged in providing services to its customers. The provision of services usually means providing professional services wherein goods are not involved. For example, a law firm wherein law services are provided to the clients.

To identify: The account that a merchandiser uses but a service company doesn’t use.

Answer to Problem 1QC

Solution: The correct answer is (d) All the above.

Explanation of Solution

1. In the service industry, the source of revenue is the provision of service. There are no goods sold. Hence, the service company doesn’t maintain cost of goods sold account.
2. The income statement is prepared by subtracting the costs of doing business from the revenues earned by the service company. The material cost incurred by the service provider is usually charged in the bill separately or included in the sale revenue. However, there are no stocks or inventory. Hence, service company doesn’t maintain ‘Merchandise InventoryAccount’.
3. Service Company deals in providing services, instead of goods. Hence, they record revenue in service revenue account, instead of sales revenue.

Conclusion

The service company does not use a ‘Cost of Goods Sold Account’, ‘Merchandise Inventory Account’ and ‘Sales Revenue Account’.