Financial reports are one of the most important documents a company maintains. These reports allow companies to clearly understand their financial condition, thereby minimizing financial risk. To ensure accurate results, financial reports must be prepared systematically.
Each company has a different reporting system; for example, manufacturing and retail companies have different reporting systems than service companies. This difference occurs because their operations focus on providing services, not goods.
In this context, financial reports serve to record all financial activities related to providing services to customers, including revenue, operating costs, and profit or loss.
To learn more about how a service company's financial report is structured, here's some information. Let's take a look!
What is a Service Company?
A service company is a type of company whose primary activity focuses on providing services to consumers without producing a physical product. The services offered can include expertise, knowledge, time, or effort, aimed at helping meet customer needs or resolve problems.
Unlike manufacturing or trading companies that sell tangible goods, service companies sell something intangible. Therefore, the quality of the service is highly dependent on the competence and professionalism of the service provider.
Examples of service companies include beauty salons, legal consultants, travel agencies, vehicle repair shops, and graphic design or training providers. Because services are intangible, they are typically consumed immediately upon delivery and cannot be stored for later use.
Differences in Financial Statement Components for Service Companies and Retail Companies
Although both are financial statements, they have different components. Here are the differences between the financial statements of service companies and retail companies.
1. Income Statement
Service companies prepare income statements without including Cost of Goods Sold (COGS) because they do not sell physical products. Their revenue is derived from services provided to customers, and their operating expenses include employee salaries, rent, supplies, and utilities.
Conversely, in retail companies, the income statement includes COGS because selling goods is the core of their business. Their revenue comes from product sales, and the report also includes sales discounts, sales returns, and COGS, so that gross profit can be calculated before deducting operating expenses.
2. Balance Sheet (Statement of Financial Position)
Service companies tend to have a simpler balance sheet structure. Their assets generally consist of cash, accounts receivable, supplies, and office equipment. They do not have an inventory account because they do not sell goods.
On the other hand, retail companies have an inventory account as a key component of current assets. This inventory is crucial because it is the primary source of revenue. Furthermore, retail companies may also have fixed assets directly related to sales activities, such as display racks, display cases, or cash registers.
3. Statement of Changes in Equity
In general, both service and retail companies have a similar statement of changes in equity structure. This statement records initial capital, additions or reductions to capital by the owner (such as equity or additional investments), and net profit or loss for a specific period.
However, the difference lies in the source of this profit or loss. In service companies, changes in equity are usually influenced by efficiency in providing services and managing costs. Meanwhile, in retail companies, changes in equity are often influenced by fluctuations in sales and inventory costs.
4. Cash Flow Statement
Cash flow statements for service and retail companies essentially have the same structure, covering operational, investing, and financing activities. However, the content of operating cash flow can differ. Service companies tend to have cash flow derived from receipts of service payments and routine operational expenses.
In retail companies, however, operating cash flow includes not only sales receipts but also significant expenses for purchasing inventory for resale. Therefore, cash outflows for inventory are a crucial component in retail companies.
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