Which statement best describes the difference between a service business and a merchandising business in terms of inventory and COGS?

• A. A service business typically has significant inventory; a merchandising business has no inventory; COGS applies to both equally.
• B. A service business typically has little to no inventory; a merchandising business holds and sells inventory; COGS is only for the merchandiser.
• C. Both always carry inventory and report COGS in the same way.
• D. Merchandising businesses do not recognize COGS.

Answer: (B)

Inventory and COGS reflect whether you’re selling a service or goods. A service business delivers work rather than physical products, so it typically has little or no inventory on hand to sell. The costs tied to delivering the service are usually recorded as operating expenses rather than cost of goods sold. A merchandising business, by contrast, buys goods to resell and keeps them as inventory. When those goods are sold, their costs are reported as cost of goods sold, which shows the expense tied to the goods actually sold during the period. This distinction explains why COGS is relevant for merchandisers but not for pure service providers. For example, a consulting firm would record most costs as operating expenses, while a clothing retailer would track beginning inventory plus purchases minus ending inventory to determine COGS. The other statements mischaracterize inventory needs or how COGS works across these types of businesses.