What are the differences between income statements from merchandising companies vs. service companies?
Even though both merchandising companies and service companies conform to generally accepted accounting principles, or GAAP, there are differences in the way each type of firm prepares its financial statements. With respect to the income statement, most differences center around the existence of inventory.
Merchandising Company Vs. Service Company
A merchandising company engages in the sale of tangible goods to consumers. These businesses incur costs, such as labor and materials, to present and ultimately sell products. Service companies do not sell tangible goods to produce income; rather, they provide services to customers or clients who value their innovation and expertise. Examples of service companies include consultants, accountants, financial planners and insurance providers.
Differences in the Income Statement
Both merchandising companies and service companies prepare income statements to help investors, analysts and regulators understand their internal financial operations. Merchandising companies hold and account for product inventory, which makes their income statements inherently more complicated. Much of the inventory calculation is manifested through the line item cost of goods sold, which is an expense account describing the cost of purchasing inventory and delivering it to customers. If you look at an income statement for a service company, you will not see a line item for cost of goods sold.
The nature of increases or decreases in net revenue for each type of company is also different. Service companies do not typically have enormous expense accounts, meaning that fluctuations in net revenue are almost entirely a function of generating sales. Manufacturing companies are less certain, since a decrease in net revenue could be an increase in expenses or a decrease in revenues.