Question

1. List the accounts of a merchandising company which employs a perpetual inventory system that will not appear in the financial statements of a service company. When listing the account names, indicate if it appears on the Income Statement or on the Balance Sheet..
2. Explain what sales discounts and a purchase discounts are. What account will a buyer credit for the amount of the purchase discount.
3. Why would a financial statement user prefer a multiple-step income statement instead of a single-step income statement.

Answer 1

Answer to Question 1

The following accounts in the merchandising company would not appear in the financial statements of a servicing company-
(a) Cost of goods sold
(b) Inventory

Answer to Question 2

Sales discounts are discount provided by the company upon sale of goods to its customers. It is an expense in the income statement.

Purchase discounts are discount receiveed by the company upon purchase of goods from its suppliers. It is an income in the income statement.

Answer to Question 3

The multi-step income statement provides gross profit in addition to the single step income statement. It separates the purchase or trading related expenses from other operating expenses.

Hence, a financial statement user may prefer multi-step income statement over the single-step income statement.