The manufacturing business is where raw materials and goods are used to produce finished goods while merchandising business is that where finished products are bought and are sold to the end-users or consumers. The difference between the income statement of a manufacturing business and a merchandising business is explained below:
Earnings: Manufacturing businesses buy raw materials and convert the same into finished products. These are then sold in the market to earn profit, whereas, merchandising businesses are the ones buying goods and reselling the same in order to earn profits.
Cost of goods sold: In the manufacturing business, cost of goods sold refers to the costs that are incurred in acquiring or manufacturing of products. The cost of goods sold can be calculated by deducting the value of ending inventory from purchases. The income statement in a merchandising business shows the variance between gross revenue and cost-of-goods sold. In the merchandising business, the cost of goods sold is the value that a seller pays for the inventory sold.
Method: In the manufacturing business, the manufacturer also considers work-in-progress goods. These are partially manufactured goods that arenâ€™t finished before the end of the ongoing accounting period. Also, manufacturers count finished products that are ready to be sold. Manufacturers should also consider labor and factory overhead costs in determining expenses that are related to the cost of goods. This method is different from that adopted by merchandisers because they do not include labor costs in cost-of-goods.
Advantages of preparing an income statement
The benefits of preparing an income statement for a manufacturing company are mentioned below:
The income statement provides information on revenues of a company.
This financial statement also provides information on the cost of goods sold, employee expenses, and operational expenses.
The income statement considers taxes that are applied to earned income.
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