Income Statements and Balance Sheets

Which of the following is a key difference in the income statement between a service sole-proprietorship and a merchandising corporation?

• Service sole-proprietorships always have higher depreciation expense than merchandising corporations.

• Merchandising corporations never report bad debt expense.

• Service sole-proprietorships pay corporate income tax, while merchandising corporations do not.

• Merchandising corporations report cost of merchandise sold, while service sole-proprietorships typically do not.

On the balance sheet, which item is most likely to be significant for a merchandising corporation but absent or minimal for a service sole-proprietorship?

• Payroll liabilities

• Accumulated depreciation

• Inventory

• Allowance for uncollectible accounts

How does the equity section differ between the two business types?

• Neither business type reports equity on the balance sheet.

• A merchandising corporation has capital stock and retained earnings, while a service sole-proprietorship has an owner’s capital account.

• Both have identical equity sections with capital stock.

• A service sole-proprietorship has stockholders’ equity, while a merchandising corporation has an owner’s capital account.

Which of the following is true about bad debt expense for these businesses?

• It is more likely to be significant for a merchandising corporation due to higher credit sales volume.

• It is always larger for a service sole-proprietorship because of service billing.

• It is never reported by either business type.

• It is only reported by businesses with no inventory.

What is a key difference in taxation between the two business types?

• Neither business type pays any form of income tax.

• Both pay corporate income tax on their profits.

• A merchandising corporation pays corporate tax, while a service sole-proprietorship’s profits are taxed on the owner’s personal return.

• A service sole-proprietorship pays corporate tax, while a merchandising corporation does not.

Which of the following best describes gross profit for a merchandising corporation?

• Total revenue minus depreciation expense

• It is not calculated for a merchandising corporation

• Revenue minus operating expenses

• Sales revenue minus cost of merchandise sold

Which type of business is more likely to have significant payroll liabilities on its balance sheet?

• Neither reports payroll liabilities

• Both have equal payroll liabilities

• Service sole-proprietorship, due to reliance on labor

• Merchandising corporation, due to a larger workforce

What is true about depreciation expense on the income statement?

• It is never reported by either business type.

• It may appear for both, but is often larger for merchandising corporations due to more fixed assets.

• It is only reported by service sole-proprietorships.

• It is always identical for both business types.

Which of the following is a current asset typically found on a merchandising corporation’s balance sheet but not a service sole-proprietorship’s?

• Equipment

• Accounts payable

• Cash

• Inventory

How does operating income differ between the two business types?

• It includes corporate income tax for both.

• It is not calculated for either business type.

• For a service sole-proprietorship, it’s revenue minus operating expenses; for a merchandising corporation, it’s gross profit minus operating expenses.

• It is calculated as gross profit minus operating expenses for both.