Q9Q - Intermediate Accounting (Kieso)

Question

(a) How are the components of revenues and expenses different for a merchandising company? (b) Explain the income measurement process for a merchandising company.

Step-by-Step Solution

Answer

a. The components of revenues and expenses are different for a merchandising company because here, the sales are regarded as the main source of revenue, and the expenses are split into two groups; operating expenses and cost of goods sold.

 

b. The income in a merchandising company is measured by comparing the sale value of the merchandising inventory with the cost of goods sold and operating expenses.

Step by Step Solution Step 1: Meaning of Merchandising Company

Merchandising company is the one that purchases tangible goods and sells them again to the customers. The costs incurred by this business include material and labor costs for presenting and selling products.

Step 2: Cause behind the difference in the components of a merchandising company

In a merchandising company, the components of revenues and expenses are different. In this company, the revenues are considered sales revenue, as well as the expenses, which comprise the cost of goods sold and operating expenses.

Step 3: Process of income measurement for a merchandising company

The income measurement process is as follows;

First, we need to subtract the cost of goods sold from the sales revenue to arrive at gross profit. Further, operating expenses are subtracted from gross profit to obtain net income for the period.