How to use this module?

Before starting this module, I want you to set aside other task/s that may disturb you
while enjoying the lessons. Read the simple instructions below to successfully enjoy the
objectives of this kit. Have fun!
1. Follow carefully all the contents and instructions indicated in every page of this module.

2. Write on your notebook the concepts about the lessons.

3. Perform all the provided activities in this module.

4. Let your subject teacher assess your answers.

5. Analyze conceptually the post-test and apply what you have learned.

6. Enjoy studying!

Parts of the module

 Expectations – These are what you will be able to know after completing the lessons in

the module.

 Pre-test – This will measure your prior knowledge and the concepts to be mastered

throughout the lesson.

 Looking Back to your Lesson – This section will measure what learning and skills did

you understand from the previous lesson.

 Brief Introduction – This section will give you an overview of the lesson.

 Lecture – This section will help you understand the facts, topics, concepts, principles and

procedure.

 Activities – This is a set of activities that you need to perform.

 Remember – This section summarizes the concepts and applications of the lessons.

 Post-test – This will measure how much have you learned from the entire module.

Module 3: Lesson 1 - Types of Business According to Activities Page | 1

FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT 1

Module 3: Lesson 1 - Types of Business According

to Activities

Expectation
Specifically, this module will help you to:
1. describe a service entity and give examples;
2. describe a merchandising entity and give examples; and
3. describe a manufacturing entity and give examples.

Pre-test
Part I. Identification: Directions. Identify if it is a service, merchandising, and
manufacturing business. Write your answer in the space provided.

 Bruno’s Barber Shop ____________________________________

 Clean Ko Place Mo Cleaning Services ____________________________________
 Tutorial Services ____________________________________
 Manila Hotel ____________________________________
 Cynthia’s Food Vendor ____________________________________
 Susan’s Roses Flower Shop ____________________________________
 Wash Your Problem Laundry Shop ____________________________________
 Bread Pit Bakery ____________________________________
 Cut and Face Parlor ____________________________________
 Fish Be With You Fish Shop ____________________________________

Module 3: Lesson 1 - Types of Business According to Activities Page | 2

 Looking Back to your Lesson

Part I. Classification: Direction. Classify each of the following as either external user ( E) or
internal user (I).
_____1. Government _____6. Potential Investors
_____2. Owners _____7. Academe
_____3. Customer _____8. Management
_____4. Employees _____9. Creditor
_____5. General Public _____10. Stockholders

Part II. Identification: Direction: Please read and analyze the questions carefully. Identify what
is being ask. Write the correct answer in space provided.

Sole Proprietorship Corporation Stocks

Partnership Cooperative

__________________1. It is “an artificial being created by operation of law, having the right of
succession and the powers, attributes, and properties expressly authorized by law or incident of
its existence”.
__________________2. It is a duly registered association of persons with a common bond of
interest, voluntarily joining together to achieve their lawful common social, economic end and
cultural needs, making equitable contributions to the capital required and accepting a fair share
of the risks and benefits of the undertaking in accordance with universally accepted cooperative
principles”.
__________________3. It is form of business that is owned by one person; the simplest, and the
most common form of business organization.
__________________4. It is a contract whereby two or more persons bind themselves to
contribute money, property, or industry to a common fund, with the intention of dividing the
profits among themselves.
__________________5. It is an intangible (i.e., no physical form) asset evidencing a
proportionate share in the properties of a corporation.

Module 3: Lesson 1 - Types of Business According to Activities Page | 3

 Brief Introduction
A for Apple
Through its consistently high quality and innovative products, Apple Inc. has been one of
the leading manufacturing companies in the consumer electronics industry. Currently, it is one of
the largest companies worldwide with a market capitalization of approximately $732 billion. Its
best-known products are the Mac computers, iPhones, and iPads.
Apple Inc. designs, manufactures, and sells its own products. Apple products are
manufactures all over the world. With around 200 suppliers, ten thousands of employees and
several production facilities, Apple guarantees that its products are of high quality and value to
its consumers. Its success is attributed to a strong supply chain, empowered employees, and
excellent customer service. Today, Apple continues to develop out-of-the-box products that
leave impact to its customers’ lives.
Source: https://www.apple.com/supplier-responsibility/

Lecture
A business is an organization that converts inputs or resources such as material, labor,
and overhead into outputs which are usually either goods or services. In this module, we will
discuss the different types of business according to activities, their business requirements, and
their advantages and disadvantages. There are three major types of business as follows:

1. Service business
2. Merchandising business
3. Manufacturing business

I. Service Business

Service companies are firms that generally use their employees to provide intangible
products or services to customers. These services include professional skills, advice, expertise,
and consultations. The primary source of revenues of service companies is the performance of
services, often referred to as service revenue.

Examples: A law firm is an example of a service company as it provides legal advice

to its client.
A school is considered a service company as it relies heavily on its
employee (i.e., teachers) to educate its students.
A bus company is a service company though it invests heavily on
equipment which are used to perform transportation services.
Other examples of service companies are banks, accounting firms,
hospitals, barber shops, beauty parlors and repair shops.

Module 3: Lesson 1 - Types of Business According to Activities Page | 4

 One concept in business is the operating cycle. Operating Cycle is the time it takes for a
company to create products, sell these products, and collect cash payments from customers. For
service companies, the major phases of their operating cycle include paying out money for
employees and other operating expenses, performing the services, and collecting cash payments
from customers.

Cash on
Hand

Receives Pays
payment employees
from and other
customers expenses

Performs
Services

Operating Cycle of Service Companies

One of the advantages of a service company over the other types of business is the
absence of inventory or tangible goods held by the company. Holding inventory entails proper
management and control measures which make it costly. Moreover, because service companies
produce intangible products, they do not require production facilities and that frees up cash for
other important business matters.

Considering that these companies rely on human capital, one drawback to service
companies is the inability to standardize services performed vary from one client to another.
Likewise, in order to ensure that services given to customers are of high quality, constant
evaluation and trainings are administered. With human capital being limited, trainings and
employment benefits are also vital to attract, retain, and motivate highly skilled employees.

Module 3: Lesson 1 - Types of Business According to Activities Page | 5

II. Merchandising Business

Merchandising companies sell tangible products. This type of business buys finished
or almost finished goods from their supplier and resells the same to customers. Merchandising
companies primarily earn revenues from the sale of the goods or merchandise, also known as
sales revenue or sales. They make a profit by selling the merchandise or products at prices that
are higher than their purchase costs. This type of business is also known as "buy and sell".

There are two types of merchandising companies:

1. Retailer – a merchandising company that sells goods directly to customers.

2. Wholesaler – is a merchandising company that sells goods to retailers.

Examples: book stores, sari-sari stores, hardware stores, department stores, public
market

The operating cycle of a merchandising company is typically longer than that of a service
company. It starts with the purchase of goods to be held for resale, also known as inventory. The
company eventually sells the inventory to customers. The cycle ends with the receipt of cash
payments. As you can see, the purchase of inventory and its subsequent sale lengthen the cycle.

Cash on
Hand

Receives
Payment Buys
from Goods
Customers

Stores
Sells
good as
Inventory
inventory

Operating Cycle of Merchandising Companies

Module 3: Lesson 1 - Types of Business According to Activities Page | 6

 The existence of a tangible product provides a leeway to merchandising companies to
make customers notice their products, thereby promoting sales. Relative to service and
manufacturing companies, these companies generally consume less conversion time, effort, and
cost.

As stated holding inventory involves cost and this becomes a disadvantage to

merchandising companies. For instances, Daniel, who owns a 24-hour convenience store, has to
ensure that there is a supply of goods enough to meet customer demand. He orders from
suppliers based on the expected sales and pays for the goods and for the cost of delivery. Once
goods are received, they are put in the proper storage room or equipment to preserve product
quality. Security measures which include installation of CCTVs and detectors are being
implemented to safeguard the goods. All these activities for managing inventory require cost
which involves regular monitoring.

III. Manufacturing Business

Manufacturing companies, or simply manufacturers, are relatively complicated

organizations than service and merchandising companies. As the name suggests, manufacturers
create their own products. They use raw materials, components, or parts which are processed
using machines, computers, and labor to produce finished goods. Manufacturers typically
employ large-scale production which is done in manufacturing plants. Similar to merchandising
companies, they earn sales revenues primarily from sale of manufactured products. The products
of manufacturing companies can be sold directly to consumers, retailers, and other
manufacturers.

Examples: Toyota builds cars and sells them to customers though their dealers
nationwide.
Uniliver manufactures its products like Dove and Cream Silk and sells
them to retailers such as supermarkets.
3M manufactures adhesives which are brought and used by aircraft
manufacturers in creating their own products.

Since a manufacturing company produces its own products, its operating cycle generally
has the longest period compared to service and merchandising. The cycle has an additional phase
which is the production of goods. These goods are also held as inventory and later sold to its
customers. Likewise, the operating cycle of a manufacturing company ends with the collection of
cash payments.

As an illustration, imagine NIKE Inc. which is a leading shoe manufacturer. It owns more
than 600 factories across the globe where Nike shoes are made. It acquires its raw materials from
various suppliers, hire more than a million of factory workers, and invests heavily on technology.
Using all these inputs, Nike shoes are manufactures and ensured that they reach quality

Module 3: Lesson 1 - Types of Business According to Activities Page | 7

standards. After passing the standards, the shoes are shipped to distributors and retailers who will
sell the products to consumers.

Cash on
Hand

Pays for
Receives
inputs
payment
(materials,
from
labor,
customers
overhead).

Converts
Sells inputs into
inventory finished
goods

Stores
finished
goods as
inventory

Module 3: Lesson 1 - Types of Business According to Activities Page | 8

 Operating Cycle of Manufacturing Companies

One of the advantages of manufacturing one’s product is quality control wherein

manufacturers can ensure that their products meet the standards set. Multiple quality inspections
are carried out to detect spoilage and prevent low-quality goods from falling into the hands of the
customers.

Manufacturers generally need initial capital outlay to run production facilities and that
requires large sum of money. In converting the inputs to finished goods, overheads costs such as
utilities and rent expense are incurred. These costs require frequent monitoring to make sure that
the companies are not overspending or wasting resources. Also, manufacturers need to finance
their quality control procedures to avoid product failure costs. Moreover, the existence of
inventory implies further costs of managing, handling, and storing manufactured goods.

Additional information:

There are businesses that may be classified under more than one type of business
(hybrid). A bakery, for example, combines raw materials in making loaves of bread
(manufacturing), sells hot pan de sal (merchandising), and caters customers’ orders in small
coffee table servings of ensaymada and hot coffee (service).
Activities
Activity I. Identification. Direction: Identify if it is a service, merchandising, manufacturing
business or hybrid. Write your answer in the space provided.
_______________________1. Raw materials are available
_______________________2. Supplies are used, no goods to be sold
_______________________3. Bakery
_______________________4. Salon and Barber shop
_______________________5. Goods to be sold are purchased from a supplier
_______________________6. Provides services to customers
_______________________7. Robinson appliances
_______________________8. Sells goods to customers
_______________________9. Goods to be sold are produced by the company itself
_______________________10. Laptop store

Remember

Module 3: Lesson 1 - Types of Business According to Activities Page | 9

 Types of
Business Dis-
Definition Input Output Advantages Examples
According to Advantages
Activities
Firms that Labor Intangible; *absence of *inability to Accounting
generally use Service inventory standardize and law firms,
their *no services hospitals,
Service employees to production schools,
provide facilities *maintaining salons
services to human
customers capital
Firms that buy Goods or Tangible; *visible Managing Supermarkets,
finished or merchandise Merchandise products inventory convenience
almost finished bought from product *less stores,
Merchandisin goods from suppliers conversion, bookstores,
g their suppliers time, and department
and resell the effort stores
same to
customers
Firms that Raw Tangible; *quality *generally Car
create their materials, Manufactured control need companies,
own products labor, product *visible production consumer
overhead products facilities products
*high companies,
conversion electronic
Manufacturing costs companies,
*cost of energy
quality manufacturers
control

*managing
inventory
Post-Test
Part I. Multiple Choice. Direction: Encircle the letter of the BEST answer. Strictly NO erasure.

1. The major input used by service companies is _______.

A. Raw materials B. Labor C. Overhead D. All of the above

2. A (A. retailer B. wholesaler) is a merchandising company that sells goods directly to

retailers.

3. Which of the following is NOT considered a service company?

A. Bus company B. Bakeshop C. Beauty salon D. Carwash business

4. Services performed by service companies may include all of the following, EXCEPT?
A. Transportation services
B. Professional services
C. Legal advice

Module 3: Lesson 1 - Types of Business According to Activities Page | 10

 D. None of the above

5. A (A. retailer B. wholesaler) is a merchandising company that sells goods directly to

customers.

6. Rodriguez Co., an accounting firm, earns ₱120,000 from its audit engagement with San
Miguel Corporation. The ₱120,000 is considered as Rodriguez Co.s (A. Service B. Sales)
revenues.

7. Which of the following is considered a service type of business?

A. Dresses by Charlotte
B. Bianca’s School for Toddlers
C. Shakira’s Cakes and Pastries Bakery
D. Abby’s Meat Shop

8. The operating cycle of a service company involves which of the following?

A. Collecting cash payments
B. Paying out labor and other operating expenses
C. Performing services
D. All of the above

9. What is the primary sources of revenues of service companies?

A. Sales of finished goods
B. Sales of component parts
C. Performance of service
D. Sales of equipment
10. Sophia buys candies from Candies Manufacturing and sells them in her sari-sari store.
Sophia earns revenue from ____________________.
A. The sale of candies in her sari-sari store
B. The sale of Candies Manufacturing
C. The purchase of supply of candies
D. All of the above

11. (A. Service B. Sales) revenues is the income earned by merchandising companies.

12. Service companies are to service revenues as manufacturing is to (A. production B. Sales)
revenues.

13. (A. Merchandising B. Manufacturing) companies use raw materials, components, or parts
which are processed using machines, computers, and labor to create their own products.

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14. Which of the following resources is/are used as major inputs of manufacturing companies?
A. Raw materials B. Labor C. Overhead D. All of the above

15. Manufacturing companies are also known as (A. Producers B. Manufacturers).

16. (A. Supplies B. Inventory) are goods held by a company and are subsequently sold to
customers.

17. Which of the following is considered a merchandising company?

A. Rey’s Convenience Store
B. National Book Store
C. SM Hypermarket
D. All of the above

18. Which of the following is NOT considered as a manufacturing company?

A. Car company B. Bank C. Bakery shop D. Oil company

19. Samsung is a major player in the electronics industry with products such as tablets,
smartphones, cameras, and laptops. It distributes its products to its stores and dealers all over
the country. Some of its authorized dealers include Robinsons Appliances, Abenson, SM
Appliances Center, and Automatic Centre. Which of the following is considered a manufacturing
company?
A. Samsung B. Robinsons Appliance C. Abenson D. All of the above except a

20. Based on number 19, which of the following is considered a retail company?
A. Samsung B. Robinsons Appliance C. Abenson D. All of the above except a
Reflection

1. Think of three (3) companies/stores who do service, merchandising and manufacturing.

Write your answer on the space provided.

Service Merchandising Manufacturing

__________________ ________________________ ________________________
__________________ ________________________ ________________________
__________________ ________________________ ________________________

Module 3: Lesson 1 - Types of Business According to Activities Page | 12

2. If you will having a business of your own, which of the following businesses industry
(service, merchandising or manufacturing) would you likely to enter?
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________

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