Financial reporting by manufacturing companiesMany of you will work in manufacturing companies or provide services for them. Others will work in retail or service organizations that do business with manufacturers. This section will help you understand how manufacturing companies work and how to read both their internal and external financial statements. Show
Assume you own a bicycle store and purchase bicycles and accessories to sell to customers. To determine your profitability, you would subtract the cost of bicycles and accessories from your gross sales as cost of goods sold. However, if you owned the manufacturing company that made the bicycles, you would base your cost of goods sold on the cost of manufacturing those bicycles. Accounting for manufacturing costs is more complex than accounting for costs of merchandise purchased that is ready for sale. Perhaps the most important accounting difference between merchandisers and manufacturers relates to the differences in the nature of their activities. A merchandiser purchases finished goods ready to be sold. On the other hand, a manufacturer must purchase raw materials and use production equipment and employee labor to transform the raw materials into finished products. Thus, while a merchandiser has only one type of inventory—merchandise available for sale—a manufacturer has three types—unprocessed materials, partially complete work in process, and ready-for-sale finished goods. Instead of one inventory account, three different inventory accounts are necessary to show the cost of inventory in various stages of production. Looking at Exhibit 2, you can see how the inventory cost flows differ between manufacturing and merchandising companies. We compare a manufacturer’s cost of goods sold section of the income statement to that same section of the merchandiser’s income statement in the chart below. There are two major differences in these cost of goods sold sections: (1) goods ready to be sold are referred to as merchandise inventory by a merchandiser and finished goods inventory by a manufacturer, and (2) the net cost of purchases for a merchandiser is equivalent to the cost of goods manufactured by a manufacturer.
Unlike a merchandiser’s balance sheet that reports a single inventory amount, the balance sheet for a manufacturer typically shows materials, work in process, and finished goods inventories separately. The video and chart will explain these concepts further.
The next section will explain the different cost types of direct materials, direct labor and overhead.
All three types of companies need to determine the costs of product or services to
A final, very important function of managerial accounting is to develop plans and policies to ensure internal control and that company objectives are accomplished (control). Standard Costing System
Inventory Accounts for Manufacturing Companies
Income Statement Comparison Merchandising versus Manufacturing Company The income statement of a manufacturing company is identical to that of a merchandising company. The difference between the two types of companies lies in the Determination of cost of goods sold
Balance Sheet Statement Comparison Merchandising versus Manufacturing Company How is the balance sheet of a merchandising firm different from the balance sheet of a service business?Balance Sheet Differences
However, there is one main difference in the accounts listed. This difference is found in the asset section. Merchandising companies will have an asset for inventory, whereas service companies do not.
What is the difference between a manufacturing company and a merchandising company?A merchandising company resells goods that it purchases from its suppliers. A manufacturing company produces goods from raw materials, which is later sold as a finished product.
What is the main difference between manufacturing and merchandising companies financial statement?Unlike merchandising firms, manufacturing firms must calculate their cost of goods sold based on how much they manufacture and how much it costs them to manufacture those goods. This requires manufacturing firms to prepare an additional statement before they can prepare their income statement.
What is the difference in reporting inventory for a manufacturing company and a merchandising company?Manufacturing inventory is more involved than merchandising inventory that has a pass-through element. Manufacturing inventory is generated from raw materials and direct labor and manufacturers maintain three different inventories to create what they sell (raw goods, work-in-process, and finished goods).
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What makes the balance sheet of manufacturing firm different from the balance sheet of a merchandising firm?
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