Question

How do an income statement and a balance sheet for a manufacturing company and a merchandising company differ?

Short answer

Unlike merchandising firms, manufacturing firms calculate the costs of goods sold based on the number of goods produced and the cost.

Step-by-step solution

Meaning of Income Statement

An income statement is one of the external statements that companies are expected to make. By subtracting costs from revenue, an income statement calculates the total amount of income.

The difference between the income statement and a balance sheet for a manufacturing company and a merchandising company differ

An industrial company transforms raw materials into finished goods. On its balance sheet, a manufacturing company would list three different categories of inventories: raw materials, items in production, and finished goods. The cost of goods sold for the finished goods is shown on the income statement.

A corporation that sells merchandise buys stock for resale. A corporation that engages in merchandising would only include one inventory item (merchandise inventory) on its balance sheet and the merchandise inventory as part of the cost of goods sold on the income statement.

(Note: To determine the items available for sale, the manufacturer would add the cost of goods created to the initially finished goods. To decide the items offered for sale, the merchandising company adds purchases to its initial merchandise inventory.)