What are some differences you would see when comparing the financial statements of a merchandising business and a service business?
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The starting point of the income statement Show
What is Sales Revenue?Sales revenue is the income received by a company from its sales of goods or the provision of services. In accounting, the terms “sales” and “revenue” can be, and often are, used interchangeably to mean the same thing. It is important to note that revenue does not necessarily mean cash received. A portion of sales revenue may be paid in cash and a portion may be paid on credit, through such means as accounts receivables. Sales revenue can be listed on the income statement as either the gross revenue amount or net revenue. Net revenue includes all deductions for the return of goods, the possibility of undeliverable merchandise and the expense for unrecoverable accounts receivables (also known as “bad debt expense”, which flows into the balance sheet as the allowance for doubtful accounts). Gross revenue, on the other hand, does not include these deductions. The gross revenue presentation will have the deductions listed below gross revenue, and a subtotal for net revenue below that. Sales Revenue and the Income StatementThe very first line of the income statement is sales revenue. This is important for two reasons. First, it marks the starting point for arriving at net income. From revenue, cost of goods sold is deducted to find gross profit. Depreciation and SG&A expenses are deducted from gross profit to find the operating margin, also known as EBIT. EBIT less interest expense is pre-tax income, and pre-tax income minus taxes is net income. Secondly, as the first item on the income statement, sales revenue is an important line item in the top-down approach of forecasting the income statement. The historic trend of revenue is analyzed, and revenue for future periods is forecasted. All expenses below sales revenue are often found expressed as a percentage of that revenue. As the first item listed on a financial statement, it becomes the pivot or anchor from which other line items are proportional to. This is also one of the reasons why sales revenue is known as the “top line”. Sales Revenue ExampleBelow is an example from Amazon’s 2017 annual report (10-k) which shows a breakdown of its sales according to products and services. In 2017, Amazon had net sales of $119 billion from products and $59 billion from services, for a combined total of $178 billion. As you can see, this forms the top of the income statement, and all expenses and profits or losses are located below that level in the report. Additional ResourcesThank you for reading CFI’s guide to Sales Revenue. To help you advance your career, check out the additional CFI resources below:
Learn about merchandising companies. Understand what a merchandising company is, learn what a retail company is, and identify how their income statements work. Updated: 06/11/2022 Table of Contents
A merchandising company is a business that purchases products which the intention of reselling them to consumers. While many companies create or produce the products they are selling to consumers, a merchandising company purchases these products from another company, aiming to resell the products at a higher price to make a profit. Typically, merchandising companies sell a variety of products; however, this can vary as some merchandising companies can be specialty companies. For example, a grocery store is a merchandising company that sells various food products from other businesses and manufacturers. On the other hand, a music store is also a merchandising company, though it is a specialty store, as it consists of instruments from different brands. Merchandising companies are also categorized depending on how they distribute their products. They can either be classified as retail companies or wholesale companies. Types of Merchandising CompaniesWhat is a retail company? A retail company is a business that sells products directly to consumers in a market. For example, a store at the mall that sells apparel is considered a retail company. Customers are able to shop at the store and purchase items directly from the company. A wholesale company sells products in bulk to other businesses, which are typically retailers but can be any kind of business. Wholesalers focus on distributing the products and may even manufacture the products. Prices are typically much higher at a retailer compared to a wholesale company. The retailer aims to make a profit from the merchandise that was purchased from another company, while the wholesaler typically distributes the product at a low cost since it is in bulk and can afford to lower their prices. Merchandising ActivitiesMerchandising activities cover various aspects of the business. A merchandising company is responsible for purchasing products from other companies and selling these products to consumers. Some purchasing systems may be complex for merchandising companies with various products from different sellers. Other purchasing systems may be simple as the same products are easily purchased on a regular basis. It's important for merchandise companies to understand how much to purchase to have enough inventory for the demand. However, they must ensure that these products purchased are expected to sell. The operating cycle refers to the duration and process between the purchase of a product and when it is sold to a consumer. The operating cycle consists of several ongoing steps as products are purchased and sold. These include purchasing inventory, selling merchandise, collecting payments from transactions, and using this income to purchase more products for inventory.
Inventory Systems in Merchandising CompaniesCompanies use different methods to track and record their inventory on hand. There are two main inventory systems that are commonly used: periodic systems and perpetual systems. A periodic inventory system relies on the inventory counts that are placed periodically, whether that is on a weekly, monthly, or yearly basis. Periodic inventory may not be as accurate since these counts are only completed occasionally. Though there are drawbacks to periodic inventory, it is simplified and completed manually. A perpetual inventory system is updated to reflect the current inventory as each sale is completed. The perpetual inventory system uses computer technology, which can be more costly but improves the accuracy of the recorded inventory on hand. As purchases are recorded, the inventory is adjusted to reflect the recent transactions. The perpetual inventory system is generally more precise and preferred for businesses with large amounts of inventory, but a periodic inventory system may work for businesses with smaller amounts of inventory. What are examples of merchandising companies?Merchandising companies resell products that have been purchased from other companies. Some examples include Amazon and Walmart, however, these companies may also produce their own products. What are merchandising activities?Merchandising activities include the basic purchasing and selling activities required to run the business. A merchandising company must purchase products from other companies in order to sell the products directly to consumers. What is a merchandise income statement?The income statement used for merchandise companies is referred to as the multiple step income statement. Like other income statements, the company can determine its net income, though the multiple step income statement accounts for the cost of goods sold. Register to view this lessonAre you a student or a teacher? Unlock Your EducationSee for yourself why 30 million people use Study.comBecome a Study.com member and start learning now.Become a Member Already a member? Log In Back What teachers are saying about Study.com Try it now Already registered? Log in here for access Create an account to start this course today Used by over 30 million students worldwide Create an account Which financial statement is most different when comparing service and merchandising businesses?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.
What is the major difference between the income statement for a merchandising business?What is the major difference between the income statement for a merchandising business and a service business? The cost of merchandise sold section.
What are the financial statements of a merchandising company?A merchandising company uses the same 4 financial statements we learned before: Income statement, statement of retained earnings, balance sheet, and statement of cash flows.
What is the main difference between a merchandising business?While manufacturing begins the process of designing and creating goods, merchandising completes the task by taking products and getting them into the hands of consumers.
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