Q. Income statements - Service and merchandising company?

We evaluate the main divisions of an income statement for a service company with those for a merchandising company. To determine productivity or net income a service company deducts total expenses incurred from revenues earned. A merchandising company is a more complex business and consequently has a more complex income statement.

Merchandising companies should deduct from revenues the cost of the goods they sell to customers to arrive at gross margin. After that they deduct other expenses. The income statement of a merchandising company has three chief divisions (a) sales revenues which result from the sale of goods by the company (b) cost of goods sold which is an expense that indicates how much the company paid for the goods sold and (c) expenses which are the company's other expenses in running the business.

In the next two sections we confer the first two main divisions of the income statement of a merchandising company. The third division expenses are comparable to expenses for a service company which we illustrated in preceding chapters. As you study these sections remember how the divisions of the merchandising income statement are related to each other and produce the final figure-net income or net loss-which indicates the profitability of the company.