Question

Requirement 1:

Please let us know what distinguishes a merchandising business from a service business. Also, please list four accounts that would normally appear in the chart of accounts of a merchandising business but would not appear in the chart of accounts of a service business.

Requirement 2:

Rustic Furniture Co. is owned and operated by Cam Pfeifer. The following is an excerpt from a conversation between Cam Pfeifer and Mitzi Wheeler, the chief accountant for Rustic Furniture Co:

Cam: Mitzi, I've got a question about this recent balance sheet.

Mitzi: Sure, what's your question?

Cam: Well, as you know, I'm applying for a bank loan to finance our new store in Garden Grove,

and I noticed that the accounts payable are listed as $320,000.

Mitzi: That's right. Approximately $275,000 of that represents amounts due our

suppliers, and the remainder is miscellaneous payables to creditors for utilities,

office equipment, supplies, etc.

Cam: That's what I thought. But as you know, we normally receive a 2% discount

from our suppliers for earlier payment, and we always try to take the discount.

Mitzi: That's right. I can't remember the last time we missed a discount.

Cam: Well, in that case, it seems to me the accounts payable should be listed

minus the 2% discount. Let's list the accounts payable due to suppliers as

$314,500 rather than $320,000. Every little bit helps. You never know. It might make

the difference between getting and not getting the loan.

Please discuss how would you respond to Cam Pfeifer's request.

Answer 1

In a merchandsing business the core activity is to purchase and resell the tangible products while in a service business the core activity is to sell services that are intangible in nature. The items in the financial statements (income statement and balance sheet) of both the types of business is different as the merchandising business maintains tangible goods while the service business does not have any tangible goods.

There are various accounts in the merchandising business that are not there in the service business. Four of them can be listed as follows -

1) Cost of goods sold account

2) Raw material account

3) Inventory account

4) Stock insurance account.