Question

Describe how the inventory accounts of a manufacturing company differ from the inventory account of a merchandising company.

Answer 1

The inventory accounts of a manufacturing company differ from the inventory account of a merchandising company because of the accounting of cost of goods sold.

Manufacturing companies take raw materials and turn them into something that the end user wants.

Merchandising is a bit more complicated in that it is both an activity and a strategy for getting people to buy products.

It is not just what a company does to make money (sell merchandise), but also how they do it (marketing those goods).

In other words, merchandise is inventory that consists solely of finished goods.

While merchants may perform minor assembly, packaging, shipping, and delivery, these activities are not considered manufacturing.

Merchandising companies calculate their cost of goods sold by taking into account both current inventory and new purchases.

Merchandising firms typically find it simple to calculate their expenses because they know precisely what they charged for their merchandise.

Manufacturing firms, unlike merchandising firms, must calculate their cost of goods sold depending on how much they produce and how much it expenses to manufacture those goods.

This necessitates the preparation of a supplementary statement before the income statement can be prepared.

The Cost of Goods Manufactured statement is an additional statement.

Once the cost of goods manufactured is determined, it is incorporated into the income statement of the manufacturing firm to determine the cost of goods sold.

One factor that manufacturing firms must keep in mind in their cost of goods manufactured is that they manufacture products at various stages of production at any given time: some are finished, while others are still in the process.

The cost of goods manufactured statement calculates the cost of goods finished during the period, regardless of whether they were started during that period.

Hence, the inventory accounts of a manufacturing company differ from the inventory account of a merchandising company.

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