Merchandising Operations, Income Statements, and Inventory Cost-Flow Assumptions

In this area, we will discuss the accounting for inventory transactions of merchandising companies, the two formats of preparing the income statement, and how to evaluate the profitability of a merchandising company. We will also discuss how companies determine the year-end inventory value and cost of goods sold using one of the cost-flow assumptions. Finally, we will also examine the impact of choosing a certain cost-flow assumption on the tax liability and other financial statement numbers of a company.

Let's begin with this question: How is the income statement of a merchandising company different from that of a service company?