1) Distinguish between income statements of service and merchandising entities.

2. Illustrate the operating cycle of a merchandising entity.

3. What are the different source documents being used by merchandising entities.

4. A template of any source documents using MS Word.

 

1. Even though merchandising companies and service companies conform to generally accepted accounting principles (GAAP), there are differences in the ways each prepares its financial statements, especially income statements, where most differences center around the existence of inventory.

• A merchandising company engages in the purchase and resale of tangible goods.
• Service companies primarily sell services rather than tangible goods.
• Income statements for each type of firm vary in several ways, such as the types of gains and losses experienced, cost of goods sold, and net revenue.

2. Operating Cycle for a Merchandiser A merchandising company's operating cycle begins by purchasing merchandise and ends by collecting cash from selling the merchandise. ... The merchandise available is either sold (cost of goods sold) or kept for future sales (ending inventory).

The merchandising entity purchases inventory , sells the inventory and uses the cash to purchase more inventory- and cycle continues. For Cash Sales, the cycle is from cash to inventory and back to cash.

For sales on account, the cycle is from cash to inventory to accounts receivable and back to cash. In any industry, manager strives shorten the cycle. The faster sale of inventory and the collection of cash, the higher the profits.

The following illustration the operating of a merchandising company.

3. Common source documents include:

• Canceled checks
• Invoices
• Cash register receipts
• Computer-generated receipts
• Credit memo for a customer refund
• Employee time cards
• Deposit slips
• Purchase orders

4. Please see the attached file for the complete solution