8RQ - Horngren'S Financial And Managerial Accounting

Question

How do manufacturing companies differ from merchandising companies?

Step-by-Step Solution

Answer

The manufacturing company sells the product made by themselves and merchandising company sells the product purchased from suppliers.

Definition of manufacturing companies

A manufacturing company is defined as a business organization that uses labor, equipment, and facilities to convert raw materials into finished goods.

Difference between manufacturing and merchandising company

Merchandising company sells the goods which are purchased earlier from the supplier but on the other hand, a manufacturing company sells the goods which are manufactured by themselves. 

The merchandising company keeps the inventory of the product but the manufacturing company has to keep three types of inventories: raw material inventory (RM), work-in-process inventory (WIP), and finished goods inventory (FG).