Each Of The Following Companies Is A Merchandising Company Except A
Correct Answer: (C) A Moving Company
The correct option of this multiple choice question (MCQ) is (C) A Moving Company.
A Moving Company is a Service Company, not a Merchandising Company, because its primary business activity is providing services instead of buying and selling physical goods. Customers pay the company for transporting household items, office equipment, or commercial goods from one location to another. The company's income comes from service fees, not from the sale of inventory.
In contrast, a Merchandising Company purchases finished goods from manufacturers or wholesalers and then resells those goods to customers at a profit. Since merchandise is purchased for resale, inventory plays a significant role in its accounting records and financial statements.
Examples of Merchandising Companies
A Merchandising Company buys products and resells them without substantially changing their form.
Examples include:
Supermarkets
Grocery stores
Electronics retailers
Clothing stores
Furniture retailers
Bookstores
Mobile phone shops
Online retail businesses
These businesses maintain inventory, calculate Cost of Goods Sold (COGS), and report Gross Profit on the income statement.
Examples of Service Companies
A Service Company earns revenue by providing professional skills, expertise, or labor rather than selling merchandise.
Examples include:
Moving companies
Consulting firms
Law firms
Accounting firms
Rental companies
Advertising agencies
Hospitals
Educational institutions
Because these businesses generally do not purchase goods for resale, inventory valuation is normally not required. Instead, their financial performance depends primarily on generating service revenue while controlling operating expenses.
Why Inventory Matters Only in a Merchandising Company
One of the biggest accounting differences between a Merchandising Company and a Service Company is the treatment of inventory.
A Merchandising Company continuously buys inventory for resale. Therefore, accountants must determine:
Beginning Inventory
Purchases
Ending Inventory
Cost of Goods Sold
These figures directly affect both Gross Profit and Net Income.
A Service Company, however, usually has no merchandise inventory because it sells expertise, labor, or professional services instead of physical products. As a result, inventory accounting and Cost of Goods Sold calculations are generally unnecessary.
Expert Interpretation: While some service businesses may consume supplies or materials during service delivery, these items are typically recorded as operating expenses rather than inventory held for resale. This distinction is essential for preparing accurate financial statements.
How Is The Income Statement Of A Merchandising Company Different From That Of A Service Company?
Although both businesses prepare an Income Statement to measure profitability, the structure differs because of the nature of their operations.
Income Statement Of A Merchandising Company
Since a Merchandising Company buys and sells goods, it must calculate Cost of Goods Sold (COGS) before determining Gross Profit.
Cost of Goods Sold Formula
Cost of Goods Sold (COGS) = Beginning Inventory + Purchases − Ending Inventory
This formula determines the actual cost of inventory sold during the accounting period.
The Income Statement of a Merchandising Company generally includes the following sections.
(i) Sales
Sales represent the total amount earned from selling merchandise to customers during the accounting period.
(ii) Cost of Goods Sold (COGS)
Cost of Goods Sold includes the direct cost of merchandise that has actually been sold. It excludes administrative and selling expenses.
(iii) Gross Profit
Gross Profit measures the profit earned from selling goods before operating expenses are deducted.
Gross Profit = Sales − Cost of Goods Sold
A consistently healthy Gross Profit indicates that a business is pricing its products effectively and managing purchasing costs efficiently.
(iv) Operating Expenses, Non-Operating And Other Expenses
These expenses are not directly related to purchasing inventory.
Examples include:
Rent Expense
Utilities Expense
Salaries
Advertising Expense
Legal Fees
Office Supplies
Loss on Sale of Fixed Assets
Investment Losses
Collection Fees
These costs are deducted after Gross Profit to determine overall profitability.
(v) Net Income
Net Income represents the final profit earned after deducting all business expenses.
Net Income = Gross Profit + Non-Operating Revenues − Operating Expenses − Non-Operating Expenses
A positive Net Income indicates that the business generated more revenue than total expenses during the accounting period.
Income Statement Of A Service Company
Unlike a Merchandising Company, a Service Company does not calculate Cost of Goods Sold because it normally does not sell inventory.
Its Income Statement is therefore simpler.
(i) Service Revenue
Service Revenue represents the income earned from providing professional or business services to customers.
Examples include:
Consulting Fees
Legal Fees
Medical Fees
Audit Fees
Repair Services
Transportation Charges
Rental Income (where applicable)
(ii) Operating Expenses, Non-Operating And Other Expenses
Service businesses incur expenses to deliver services efficiently.
Common examples include:
Salaries and Wages
Office Rent
Utilities
Internet and Communication Expenses
Depreciation
Marketing Expenses
Bank Charges
These expenses are deducted from Service Revenue to determine profitability.
(iii) Net Income
The final profit of a Service Company is calculated as:
Net Income = Service Revenue + Non-Operating Revenues - Operating Expenses - Non-Operating And Other Expenses
If Service Revenue exceeds total expenses, the company reports Net Income. Otherwise, it reports a Net Loss.
Practical Accounting Comparison
| Basis | Merchandising Company | Service Company |
|---|---|---|
| Main Activity | Buying and selling goods | Providing services |
| Inventory | Required | Usually not required |
| Cost of Goods Sold | Calculated | Normally not calculated |
| Gross Profit | Reported | Not separately reported in most cases |
| Primary Revenue | Sales | Service Revenue |
| Financial Focus | Inventory management and sales margin | Service quality and cost control |
Practical Example
Suppose two businesses each earn $100,000 during the year.
A Merchandising Company purchases goods costing $65,000 and sells them for $100,000.
Sales = $100,000
Cost of Goods Sold = $65,000
Gross Profit = $35,000
After deducting operating expenses, the remaining amount becomes Net Income.
Now consider a Moving Company that earns $100,000 by transporting customers' belongings.
Since it provides services rather than selling merchandise, it does not calculate Cost of Goods Sold. Instead, it deducts expenses such as employee wages, fuel, vehicle maintenance, insurance, office rent, and utilities directly from Service Revenue to determine Net Income.
This example clearly illustrates why a Moving Company is classified as a Service Company rather than a Merchandising Company.
Final Thoughts
Understanding the difference between a Merchandising Company and a Service Company is fundamental in financial accounting. The presence or absence of inventory significantly affects how financial statements are prepared. Merchandising businesses calculate Cost of Goods Sold and Gross Profit because they sell merchandise, whereas Service Companies focus on Service Revenue, operating expenses, and overall profitability. Recognizing these distinctions helps students answer accounting MCQs correctly and enables business owners, managers, and accounting professionals to prepare more accurate financial reports and make informed business decisions.
Comments