A manufacturing firm can be differentiated from a merchandising firm on the basis of certain factors, such as structure of operations and the resources employed to earn profits. The key distinguishing factor between the two is that a manufacturing company produces goods while the merchandising firm markets and sells the products. Wholesalers, distributors and retailers are termed as merchandisers, whereas a factory would be considered a manufacturing unit.
The two types of firms also differ on the basis of inventory. Manufacturers operate in three kinds of inventory; raw materials, work-in-process and finished goods. Since, merchandisers deal in ready-for-sale products; they only maintain finished goods as their inventory. The service sector, on the other hand, provides intangible services; their inventory is not the same as in the context of the merchandising/manufacturing inventory. Therefore, the cost of services provided consists primarily of labor costs and overheads.
The income statement of a manufacturing and a merchandising firm is quite similar; the main difference lies in the determination of the cost of goods sold for both firms. For a merchandising firm, the cost of goods sold is computed by adding inventory purchases to the amount of finished goods at the beginning of the year and then deducting the amount of unsold finished items at the end of an accounting period. The computation of the cost of goods sold for a manufacturing firm is a lengthier process; it breaks down the cost of goods into various categories. These classifications include work-in-process calculations (partially manufactured products that still require to be completed) and raw materials used and purchased. It also takes into account the labor costs and overheads associated directly to the manufacturing process. ("Generally accepted accounting," 2009). Hence, the inventory and cost of goods sold valuations differ based on the type of company.
Accounting Standards Board, (2009). Generally accepted accounting principles for private enterprises. Retrieved from website: http://www.frascanada.ca/standards-for-private-enterprises/documents-for-comment/item18020.pdf