One key difference appears when comparing the income statements of a manufacturing company to a merchandising company. What is that difference?

Cost of goods manufactured is subtracted from sales to get gross profit on a manufacturing income statement, while cost of goods purchased is subtracted from sales to get gross profit on a merchandising income statement.

Manufacturing companies use work in process, raw materials, and finished goods inventory balances to calculate cost of goods sold, while merchandising companies use only merchandise inventory balances.

Manufacturing companies use cost of goods manufactured and merchandising companies use cost of goods purchased.

Cost of goods sold equals the cost of merchandise purchased for a merchandising company, while cost of goods sold equals the cost of raw materials purchased for a manufacturing company.

Cost of goods manufactured is calculated as follows:

Direct materials used + direct labor + manufacturing overhead ending WIP beginning WIP.

Beginning WIP + direct materials used + direct labor + manufacturing overhead + ending WIP.

Direct materials used + direct labor + manufacturing overhead beginning WIP + ending WIP.

Beginning WIP + direct materials used + direct labor + manufacturing overhead ending WIP.