How do the income statements of a manufacturing firm and a service firm differ?
IntroductionThe income statement for merchandising and manufacturing companies differs in the reporting of the cost of the merchandise (goods) available for sale and sold during the period. Show
This lecture will clarify how to prepare the income statement for a manufacturing company. A manufacturing company has no need to prepare a manufacturing account, statement of production, or a cost sheet, before preparing the income statement. The income statement remains the same except for the transfer of goods manufactured to a trading account to be treated as finished goods (at par with purchases). Thus, the company that carries on manufacturing activity besides trading activity tends to prepare:
Preparing a manufacturing account shows the cost of materials consumed, productive wages, direct and indirect expenses of production, and the cost of finished goods produced. Manufacturing account is debited with:
The total cost of production is credited to the manufacturing account by giving a debit to the trading account. Some manufacturing companies prefer to transfer finished goods from the factory to the warehouse at an increased price, by adding a pre-set margin (called the manufacturing profit) to the production cost. When preparing the income statement, the enhanced cost of production is taken into account to compute the cost of goods sold. Goods are transferred to the trading account at a value which the business would have paid had these goods been bought from other manufacturers. This approach ensures that the trading account shows a more realistic gross trading profit or loss The manufacturing profit, i.e., the excess of the transfer value of goods manufactured over their actual production cost, represents the savings the company makes by manufacturing the goods Given the rate for marking up the production cost; the accounting treatment would be as follows:
The amount of markup is added to production cost, i.e., the manufacturing profit. The above entry would increase the production cost, thereby reducing the gross profit disclosed by the trading account. At the same time, crediting the profit and loss account by the amount of manufacturing profit does not affect the net profit. ExampleAssume that finished goods are transferred from the factory to the warehouse at production cost plus a 10% manufacturing profit. Show the relevant statements. Solution Discuss with expertsWe hope you learned a lot from this article. Get a deeper discussion on this and other related topics when you connect to a financial advisor in Liverpool, NY. If you live outside the area, feel free to visit our financial advisor page for more details. Frequently Asked QuestionsWhat is an income statement?The income statement for merchandising and manufacturing companies differs in the reporting of the cost of the merchandise (goods) available for sale and sold during the period. How to prepare the income statement for a manufacturing company?.A manufacturing company has no need to prepare a manufacturing account, statement of production, or a cost sheet, before preparing the income statement. How does a manufacturing company differ from a merchandising company in the reporting of income statements?A manufacturing company differs from a merchandising company in the reporting of the cost of the merchandise (goods) available for sale and sold during the period. A manufacturing company has no need to prepare a manufacturing account, statement of production, or a cost sheet, before preparing the income statement. The income statement remains the same except for the transfer of goods manufactured to a trading account to be treated as finished goods (at par with purchases). How does a manufacturing company report depreciation?A manufacturing company reports depreciation as a separate item in the income statement after the cost of goods sold. The amount of depreciation is deducted from the gross profit to arrive at the net profit before tax. How does a manufacturing company report taxes?A manufacturing company reports taxes as a separate item in the income statement after the net profit. The amount of taxes is deducted from the net profit to arrive at the bottom line, i.E., The net profit after tax. About the Author True Tamplin, BSc, CEPF®True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists. True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics. To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.
How does the income statement of a merchandising firm differ from that of a manufacturing company?Merchandisers purchase goods from suppliers instead of manufacturing goods. The cost of these purchases from suppliers is often called net purchases in the income statement, in contrast to cost of goods manufactured in a manufacturer's income statement.
What is the difference between the income statement of a service entity and of a merchandising entity?Key Takeaways. A merchandising company engages in the purchase and resale of tangible goods. Service companies primarily sell services rather than tangible goods. Income statements for each type of firm vary in several ways, such as the types of gains and losses experienced, cost of goods sold, and net revenue.
What is the major difference between the income statements for merchandising businesses and service businesses?Terms in this set (13) What is the major difference between the income statement for a merchandising business and a service business? The cost of merchandise sold section.
What important difference between service companies and manufacturing companies is that?A manufacturing company uses labor and other inputs to transforms raw materials into finished product and then sells the product, like a merchandising company. A service company, on the other hand, does not produce/sell products, instead it provides service.
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