Midterm – Second Semester Week 5: February 22-26, 2021

I. INTRODUCTION

Good Day! Welcome to the 5th week of our Correspondence Learning Modality for the
midterm. This week, you shall be given another lesson to study and another learning task/s to
submit.

Attached to this 5th week module is the weekly Study and Assessment Guide.

DATE TOPIC ACTIVITIES OR TASKS

Read the lessons about service business.
February Types of Business Read the lessons about merchandising business.
22-26, 2021 According to Activities Read the lessons about manufacturing business.
Accomplish Written Work #3 and submit output.

For this week, February 22-26, 2021 of this term, the following shall be your guide for the
different lessons and tasks that you need to accomplish. Be patient, read it carefully before
proceeding to the tasks expected of you. GOOD LUCK!

Content V. Types of Business According to Activities

 Service Business
 Merchandising Business
 Manufacturing Business

Learning Competencies At the end of the lesson, you should be able to:

 compare and contrast the types of business according to

activities; and
 identify the advantages, disadvantages, and business
requirements of each type.

Activity  Written Work #3 (Learning Task)

Essential Questions  Why is holding an inventory costly for merchandising

business?
 What do you think is the major advantage of a manufacturer
over service and merchandising business?
 How does an operating cycle of a service business differ from
the other types of business?

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 Value Statement  “Success is not final; failure is not fatal: it is the courage to
continue that counts.”
--Winston Churchill
 “Even if you are on the right track, you’ll get run over if you
just sit there.”
--Will Rodgers

References Textbooks:
Florendo, J. 2016, Fundamentals of Accountancy, Business, and
Management 1, Rex Book Store

Paraan, M. et al. 2018, Fundamentals of Accountancy, Business,

and Management 1 For Senior High School, Books Atbp. Publishing
Corp.

Pineda, A. 2018, Fundamentals of Accounting, Business &

Management 1, Principles and Application, Mindshapers Co., Inc.

Books:
Ballada, W. 2017, Fundamentals of Accountancy Business &
Management 1, Made Easy

Aduana, N. 2016, Fundamentals of Accountancy, Business, and

Management 1 for Senior High School, Procedural Approach, C &
E Publishing, Inc.

Manalaysay, B. 2017, Fundamentals of Accountancy, Business,

and Management 1, Anvil Publishing, Inc.

Online References:
https://www.apple.com/supplier-responsibility/, Retrieved:
February 17, 2021

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 II. LEARNING CONTENT

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
$732,000,000,000. Its best-known products are the Mac computers, iPhones, and iPads.

Apple Inc. designs, manufactures, and sell its own products. Apple products are
manufactured 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/

Are you planning to enter into business and call yourself a businessman or entrepreneur? That
sounds great! But what do you want to be… a proprietor, partner, or stockholder? Do you want
to offer intangible products or sell tangible products?

Before you proceed, it is wise to consider first the different types and forms of business, firm or
enterprise you may undertake. You should carefully assess yourself, including your skills, financial
resources and team, to select the kind of business to start.

In reading the lessons for this week, you shall also take into account the following essential
questions:
 Why is holding an inventory costly for merchandising business?
 What do you think is the major advantage of a manufacturer over service and
merchandising business?
 How does an operating cycle of a service business differ from the other types of business?

INTRODUCTION

A business is an organization that converts inputs or resources such as material, labor, and
overhead into outputs which are either goods or services. In this chapter, we will discuss the
different types of business according to activities, their business requirements, and their
advantages and disadvantages. There are three (3) major types of business as follows:

1. Service Business
2. Merchandising Business
3. Manufacturing Business

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 Operating Cycle is the time it takes for a company to create products, sell these products, and
collect cash payments from customers.

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,
nonprofessional service, and other related products. The primary source of revenues of service
companies is the performance of services, often referred to as service revenues.

A law firm is an example of a service company as it provides legal advice to clients. A school is
also considered a service business as it relies heavily on its employees (i.e., teachers) to educate
its students. A bus company is a service business though it invests heavily on equipment which
are used to perform transportation services. Other examples of service companies are banks,
accounting firms, hospitals, restaurants, car repair shops, and telecommunication companies.

Cash on
Hand

Receives Pays
Payment Employees
from & Other
Customers Expenses

Performs
Services

Figure 5.1 – Operating Cycle of Service Business

For service companies, the major phases of their operating cycle include paying out money for
employees and other expenses, performing the services, and collecting cash payments from
customers.

Illustrative example:

Consider FDG & Co. which is an accounting firm. In order to conduct its business, it hires it
employees who are highly skilled accountants and who will carry out engagements with the firm’s

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 clients. FDG & Co. makes sure that its employees are compensated properly and are given
adequate trainings. These employees perform audit, consulting, and tax services for the clients.
Consequently, the clients pay for the services rendered. The operating cycle ends when FDG &
Co. receives the payment in the form of cash.

Advantages Disadvantages
1. The absence of inventory or tangible 1. The inability to standardize services as
goods held by the company. services performed vary from one client to
2. They do not require production facilities another.
and that frees up cash for other important 2. Constant evaluation and trainings are
business matters. administered to ensure that the services
given to customers are of high quality.

MERCHANDISING BUSINESS

A business entity engaged in the buying and selling of products or goods and does not change or
alter the product purchased. This means that this type of business buys finished goods from their
suppliers and resells the same to customers. In other words, no conversion process takes place
from the time the product is purchased from the supplier up to the time it is sold to the ultimate
customers.

Merchandising companies primarily earn revenues from the sale of the goods or merchandise,
also known as sales revenue or sales. There are two types of merchandising – retailers and
wholesalers. A merchandising company that sells good directly to customers is called a retailer. A
wholesaler, on the other hand, sells goods to retailers. For instance, the retailer N.L. Motorparts
buys supplies from the wholesaler Sunrise Motorparts.

Cash on
Hand

Receives
Payment Buys
from Goods
Customers

Stores
Sells
Goods as
Inventory
Inventory

Figure 5.2 – Operating Cycle of Merchandising Business

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 The operating cycle of merchandising is typically longer than of a service business. 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.

Merchandising companies usually keep inventories and generate profit by providing markup price
on the product they sold. Grocery stores, hardware, and dry goods store are common examples
of merchandising business.

Advantages Disadvantages
1. Tangible product provides a leeway to make 1. Holding inventory involves
customers notice their products, thereby promoting cost.
sales. 2. Regular monitoring of
2. Generally, consume less time and effort. inventories.

MANUFACTURING BUSINESS

A manufacturing business is a producer of goods or products. It is engaged in buying raw materials

and supplies for processing into finished products. 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. In other words, the product being
sold is not in the same form as when it was purchased.

The products of manufacturing companies can be sold directly to consumers, retailers, and other
manufacturers. For example, Toyota builds cars and sells them to customers through their dealers
worldwide. Meanwhile, Unilever manufactures its products like Dove and Cream Silk and sells
them to retailers such as SM and other supermarkets. 3M manufactures adhesives which are
bought are used by aircraft manufacturers in creating their own products.

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

Figure 5.3 – Operating Cycle of Manufacturing Business

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 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.

Illustrative example:

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, hires
more than a million of factory workers, and invests heavily on technology. Using all these inputs,
Nike shoes are manufactured and ensured that they reach quality standards. After passing the
standards, the shoes are shipped to distributors and retailers who will sell the products to
consumers. In the early 2015, Nike Inc. has a 135-day operating cycle which is comprised of 95-
day average inventory processing period and 40-day average receivable collection period.

Advantages Disadvantages
1. Quality control – manufacturing 1. Need initial capital outlay to run
companies can ensure that their products production facilities and that requires
meet the standards set. large sum of money.
2. Manufacturers benefit from having 2. In converting the inputs to finished goods,
products that are easily noticed by overhead costs such as utilities and rent
customers, thus promoting sales. expense are incurred.
3. Need to finance their quality control
procedures to avoid product failure costs.
4. The existence of inventory implies further
costs of managing, handling, and storing
manufactured goods.

GENERALIZATION

Type of
Business Merchandising Manufacturing
Service Business
According to Business Business
Activities
Firms that generally use Firms that buy finished Firms that create their
their employees to or almost finished own products.
Definition provide services to goods from their
customers. suppliers and resell the
same to customers.
Labor Goods or merchandise Raw materials, labor,
Input
bought from suppliers. overhead

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 Type of
Business Merchandising Manufacturing
Service Business
According to Business Business
Activities
Intangible product; Tangible; Merchandise Tangible; Manufactured
Output
Service products
 Absence of  Visible products  Quality control
inventory  Less conversion,  Visible products
Advantages
 No production time, and effort
facilities
 Inability to  Managing inventory
Generally need 
standardize services production
 Maintaining human facilities.
capital  High conversion
Disadvantages
costs
 Cost of quality
control
 Managing inventory
Accounting and law Supermarkets, Car companies,
firms, hospitals, convenience stores, consumer products
Examples schools, salons bookstores, companies, electronics
department stores companies, energy
manufacturers

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