What you will learn to do: Identify issues unique to merchandising companies

Business can be broken down into three major categories: merchandising, service, and manufacturing. So far, we’ve focused on service businesses because they are, in most cases, the easiest to understand. A person or group performs a service, such as accounting, and gets paid. Manufacturing, on the other hand, can be a lot more complex. A manufacturing company buys raw materials and converts them into something else.

For instance, a company that buys blanks of ash, maple, and hickory from a lumberyard and turns the blanks, called “billets,” on a lathe to create a baseball bat is a manufacturing business. The lumberyard is also a manufacturing operation. It buys logs, strips them of the bark, and saws them into usable dimensions. Even with advances in direct marketing in the past 20 years, it’s still not likely that a manufacturer will also sell the item to the “end user.” Most likely, the manufacturer will brand the item by burning “Louisville Slugger” into the wood, for example, and load a massive amount of the product onto a rail car to deliver to a wholesale operation. That wholesaler will then deliver the bats in smaller batches to retailers like Walmart, Big5, and Amazon. These distributors act as intermediate merchandising operations because the wholesale business sells to a retail merchandiser, which then sells to the general public.

There often isn’t a clear line between the three categories. For instance, is McDonald’s a manufacturer of burgers, or is it a merchandising company, or does it provide a service? You could argue for all three.

In this section, we’ll focus on what is probably most familiar to you—retail merchandising operations—and we’ll cover the three accounting issues that differentiate merchandising from service providers: inventory, cost of goods sold, and gross profit.