Chapter 2
Linking Personal Accounting to Business Accounting
33
value of the inventory is transferred to cost of goods sold on the income statement.
Cost of goods
sold
is the value of all the goods sold and is subtracted from sales revenue to determine gross profit.
Inventory and cost of goods sold will be covered in later chapters.
Manufacturing Business
The financial statements of a manufac-
turing company are shown in Figure 2.8.
A manufacturing company makes the
products that it sells. Examples of manu-
facturers include auto makers, steel mills
and furniture makers.
The balance sheet has an asset account
called inventory, similar to a retail store.
However, a manufacturer will have
different types of inventory at various
stages of production. Raw material repre-
sents the items that will be transformed
into the product that can be sold (e.g.
lumber used to make furniture). Work in
progress represents partially completed
products and finished goods represent products that are complete and can be sold to customers.
Once the items are sold, they are recorded in cost of goods sold.
It is simple to grasp the nature of a particular business by labelling it as either a service, merchandising
or manufacturing business. However, some companies that operate as a combination of two or
more of these types of businesses. Consider Apple Inc. which is well known as a manufacturer of
breakthrough technology such as the Macintosh operating system, iPod, iPhone and iPad.
The company also has a merchandising segment: it operates an online store and a retail store. These stores
predominantly sell its own self-manufactured products, but also sell complementary products produced by
other manufacturers such as security software and computer speakers.
Apple is also in part a service business because the company provides online support as well as warranty
and repair services for its products. It also provides online services such as MobileMe, a subscription-based
service that allows users to store personal data on a server, create web pages, back up key files and so on.
Therefore, Apple is a hybridof a service, merchandising andmanufacturingbusiness. However, it is reasonable
to deem the company as primarily a manufacturing business since sales of its own products represent the
majority of its total sales.
INTHE REAL WORLD
______________
FIGURE 2.8
INVENTORY
RawMaterials
Work in Progress
Finished Goods
INCOME STATEMENT
NET INCOME (LOSS)
GROSS PROFIT
OPERATING EXPENSES
SALES REVENUE
COST OF GOODS SOLD
BALANCE SHEET
ASSETS
CASH
PREPAID
EXPENSES
PROPERTY, PLANT
& EQUIPMENT
ACCOUNTS
RECEIVABLE
LIABILITIES
ACCOUNTS
PAYABLE
UNEARNED
REVENUE
BANK LOAN
OWNER’S EQUITY
OWNER’S
CAPITAL
OWNER’S
DRAWINGS
