When comparing a retail business to a service business, one of the biggest differences is in the way each generates revenue. Retail businesses earn their income by selling merchandise at a higher price than they bought it for from suppliers or manufacturers, while service-based businesses charge fees based on time, quality, and value. These different ways of generating income can impact operating cycles and the costs that a company incurs. This is reflected in the structure of the financial statements, especially in how the cash flow statement changes.
The income statement, balance sheet, and statement of cash flows are the three required financial statements that show a company’s financial performance over a period of time. These statements are also a tool for understanding a company’s liquidity and ability to pay its debts. The cash flow statement is the financial statement that changes the most when comparing a retail business to a services business, as it reflects the inflows and outflows of cash associated with inventory and sales.