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Cost Accounting: What is the Difference Between Income Statements for Manufacturing, Service and Retail? 18 Views
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Description:
What is the difference between income statements for manufacturing, service, and retail? Income statements differ between industries simply because of the nature of those industries. Service income statements show low overhead and fewer expenses than manufacturing or retail because they don’t hold inventory and have less employees. Manufacturing income statements include a lot more expenses because of all of the employees and equipment they need to perform, making their revenue appear smaller in comparison to their costs. Retail income statements don’t differ much from service industries but they do hold inventory so cost of goods sold becomes part of their accounting to ensure they’re selling that inventory.
Transcript
- 00:00
and finance Allah shmoop What is the difference between income
- 00:05
statements for manufacturing companies service companies and retail companies Three
- 00:12
Totally different stooges Let's call a mo for manufacturing Larry
- 00:17
for Service and Curly were for retail They do completely
- 00:21
different things for a living Manufacturers make stuff Retailers sell
Full Transcript
- 00:27
stuff and service companies well don't do anything with stuff
- 00:30
They just sell time and expertise So first manufacturers all
- 00:34
right As we said they make stuff you know ties
- 00:36
underwear cookies artisanal cheeses anything you can think of really
- 00:40
cars for instance Let's take cars well Some of the
- 00:42
world's most famous manufacturing companies are carmakers Ford and GM
- 00:46
and Toyota and BMW in Tesla's most manufacturing companies have
- 00:50
huge embedded cost to produce their products Think about what's
- 00:54
involved in a Tesla factory billion spent on robots to
- 00:58
make cars more money for equipment inside the factory to
- 01:01
pick up and haul cars around all the steel and
- 01:03
plastic and rubber and stuff Also they have to buy
- 01:07
most of the individual parts from someone else like the
- 01:10
cup holders come from a company in Russia The engine
- 01:13
seals come from a prison labor gang in North Korea
- 01:16
wherever the parts come from Tesla has to pony up
- 01:18
the cash for all those individual parts they buyem Manufacturing
- 01:23
companies then often have huge amounts of depreciation that there
- 01:26
running through their income statements in any given year when
- 01:29
the company has to build or upgrade a new factory
- 01:31
Well they'LL cough out massive amounts of cash to do
- 01:34
all this cash flow in that year will be ugly
- 01:37
in a half That's like this guy they'LL depreciate The
- 01:40
cost of that factory heavily is it goes down in
- 01:43
value But then say in four five years later when
- 01:45
that factory your plan is actually working running efficiently breaking
- 01:49
down on Lee every month instead of every hour like
- 01:52
it did in the beginning Well that company might then
- 01:54
show Gap adjusted accounting earnings or net income of ah
- 01:58
say three hundred million dollars But it will have produced
- 02:01
something four hundred fifty million dollars in cash Will The
- 02:05
extra cash they'LL have produced reflects the depreciation of that
- 02:08
expensive factory they built in the first place Well manufacturing
- 02:11
companies also tend to have large numbers of employees big
- 02:15
pension fund obligations that are often awkward to manage They
- 02:18
have unions They have regulatory issues to think about Like
- 02:21
the manufacturer Drilling for oil is one of the most
- 02:24
heavy caf axe or capital expenditure intensive industries on the
- 02:28
planet So you can imagine all the moving parts from
- 02:30
an accountant's perspective on top of risk and massive cost
- 02:34
for insurance When yeah this happens So issued Guess the
- 02:37
income statement Balance sheet cash flow Statements for a complex
- 02:40
manufacturing company are gnarly Yes that is the technical term
- 02:45
So then what about a service company right Like PricewaterhouseCoopers
- 02:49
Something rather accounting firm Well they're kind of the ultimate
- 02:52
service company in our little accounting world Here they sell
- 02:55
time That is the time of their employees their partners
- 02:57
and well their in house auditors Companies hire them because
- 03:01
well they have to hire them PWC is like the
- 03:04
rabbi priest and shaman who blessed the reported earnings of
- 03:07
a given company and they testified that the numbers are
- 03:10
in fact accurate If PWC is ever wrong well PwC
- 03:14
people go to jail or war us so PwC sells
- 03:18
its service of auditing It doesn't manufacture poker tables are
- 03:22
lawn fertilizer or iPhones or coffee mugs with swear words
- 03:26
on them Well they bill out there junior partners at
- 03:28
three hundred dollars an hour while paying them one hundred
- 03:31
dollars an hour and the company then the service company
- 03:33
makes a gross profit of two hundred bucks an hour
- 03:36
on that jr our time But in a service company
- 03:39
there's really no heavy capital expenditure no robots Yet no
- 03:43
large orders of steel needed no risk of an environmentally
- 03:47
destroying oil spill or explosion The risks here are legal
- 03:51
and regulatory compliance ones for which PWC pays hefty insurance
- 03:56
So there's usually very little cap packs for PWC to
- 03:59
depreciate And very a few years where cash flow is
- 04:02
negative if ever like they just get less profitable in
- 04:06
bad times Well the company has pretty steady predictable earnings
- 04:09
And unlike say an oil drilling company it has an
- 04:12
easy time laying off a third of its non union
- 04:15
workforce Should economic times get really bad Or should business
- 04:18
you know take a big turn for the worst service
- 04:21
companies can adjust quickly to changes the downside well tons
- 04:25
of competition A dozen senior accountants could get mad at
- 04:28
PWC because they didn't get the kind of state boys
- 04:31
they wanted Well this disgruntled group could then just quit
- 04:34
on Mass and start their own firm doing the same
- 04:36
accounting thing they were doing for PWC And voila A
- 04:40
competitor is born Well that's not really a danger for
- 04:43
big manufacturers Try quickly raising twenty billion dollars for drilling
- 04:47
platforms in the ocean Riggs pipes shipping contracts and on
- 04:50
on on on yeah no big oil competitors coming along
- 04:53
anytime soon Service companies typically also don't have or need
- 04:58
big balance sheets Unlike big oil or big manufacturing companies
- 05:02
service companies typically much flatter organizationally than manufacturing companies as
- 05:06
well The intellectual distance from the most senior partner CEO
- 05:11
is often not that distant from the most junior partner
- 05:13
We'LL compare that to the intellectual distance from Elon Musk
- 05:16
is brain and out of the line People who grease
- 05:19
those irks under the axles of the Tesla's way Big
- 05:22
gaps there totally different hierarchy or management style needed so
- 05:26
all kinds of challenges then get introduced to manage people
- 05:29
who are well not a smart is Ilan Okay so
- 05:32
that's a service company versus a manufacturing company Well then
- 05:36
where does the retailer come in Well let's think of
- 05:38
Macy's as the typical retailer or Nordstrom's or BestBuy or
- 05:42
needless markup And all of them quiver at the feet
- 05:45
of the world's greatest retailer Amazon So when Macy sells
- 05:50
Ah Grandpa Ty for eighty dollars in their men's department
- 05:53
well how did they make money thinking about the sale
- 05:55
from an accounting perspective Well makes use didn't make that
- 05:59
tie They just bought it Yeah of course from Thailand
- 06:02
they paid thirty dollars for it So when they sell
- 06:05
it for eighty dollars they showed gross profit of fifty
- 06:07
bucks And that fifty bucks of unit gross margin then
- 06:10
has to pay all kinds of operating cost a part
- 06:13
of the salary of the person who sourced that tie
- 06:15
or founded in Thailand It had to pay the line
- 06:18
floor robot who sold the tie to Grandmama It had
- 06:21
to pay rent on the building in which the tie
- 06:23
was sold and had to deal with the crazy high
- 06:25
level of shoplifting product loss returns breakage and so on
- 06:29
What's breakage in a Thai Well the silk ripped The
- 06:33
buyer went to return it to the little shop in
- 06:35
Thailand where they bought it and that shop had turned
- 06:37
into a Starbucks and was nowhere to be found So
- 06:40
Macy's then eats the cost of that tie That thirty
- 06:43
bucks And then there are all kinds of things Macy's
- 06:45
will have to have bought that go out of style
- 06:48
They just don't sell like those x x x x
- 06:51
l pink shirts Yeah not going to sell least not
- 06:54
for their retail price of one hundred twenty nine ninety
- 06:56
five each Macy's paid fifty bucks forum Now they have
- 06:59
to discount them heavily like Look at these things and
- 07:03
they'LL likely lose money when they eventually sell and probably
- 07:06
for less than fifty bucks each One hundred twenty nine
- 07:08
ninety five retail price was supposed to be nicely profitable
- 07:11
had the shirt sold but fifty bucks Macy's paid was
- 07:14
the wholesale price So on Macy's books that wholesale price
- 07:18
of fifty bucks was their gross cost of goods Sold
- 07:21
that fifty dollars to the cellar for that shirt in
- 07:23
Thailand To them at fifty was revenues against what probably
- 07:27
cost them twenty or thirty bucks or last to manufacture
- 07:30
So yeah the shirt maker was a manufacturer selling to
- 07:34
a retailer and maybe there was a sales representative firm
- 07:38
brand of service company right hired to sell those products
- 07:41
into Macy's and Nordstrom's and Needless Markup and well the
- 07:45
others So in this one hundred twenty nine dollars ninety
- 07:48
five cent transaction all three types of business chip in
- 07:52
here The tie manufacturer the sales rep service firm that
- 07:56
places the tie with Macy's and the retailer who eventually
- 08:00
sells it to Grandma for eighty bucks all Stooges working
- 08:03
together at least you know until someone gets seriously injured 00:08:08.68 --> [endTime] Oh
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