Inventory and Cost Flow Assumptions

Topics: Inventory, Balance sheet, Accounts receivable Pages: 4 (1299 words) Published: December 28, 2012
FND154 W3 A1 Seastrand
Professor Harrison
December 21, 2012
1. Identify the differences between service and merchandising companies and explain the recording of purchases and sales under a perpetual inventory system. Merchandising companies sell a product to their customers. Grocery stores, clothing stores and booksellers are all examples of a merchandising company. Service companies provide a service to their customers. A landscape service, a masseuse and a CPA are all examples of a service business. At the end of sale from a service company you don’t retain a solid product. A restaurant sells both products (food) and services. This is true of many businesses. A vacuum cleaner business, for instance, sells the product, the vacuum, and also the service of maintaining and fixing them when they break. Another difference between merchandising and service companies is an inventory. A service company may use products to provide their service, but with merchandisers the products are their service to their customers. According to Accounting Inventory at, “ Although the accounting cycle and the basic accounting principles are the same for companies that sell merchandise and companies that provide services, merchandising companies use several accounts that service companies do not use. The balance sheet includes an additional current asset called merchandise inventory, or simply inventory, which records the cost of merchandise held for resale. On balance sheets, the inventory account usually appears just below accounts receivable because inventory is less liquid than accounts receivable” (21081). A perpetual inventory system is an approach where inventory accounting is updated continuously as transactions are made. Books are kept to date in agreement with stock on hand within specified time periods. They are recorded with the price and account that relate to each item bought for sale to the customers. Computers and computer software have made...

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Kennon, Joshua. "Gross Profit on the Income Statement." Investing for Beginners. N.p., n.d. Web. 21 Dec. 2012. <>.
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Weygandt, Jerry J., Donald E. Kieso, and Walter Gerry Kell. Accounting principles. 4th ed. New York: Wiley, 1996. Print.
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