Merchandise inventory: Select one:
a. Includes supplies the company will use in future periods.
b. Is a long-term asset.
c. Is a current asset.
d. Is classified with investments on the balance sheet.
The correct answer and explanation is:
Correct answer: c. Is a current asset.
Explanation:
Merchandise inventory refers to the goods a company holds with the intention of selling them in the normal course of business. This inventory includes finished goods that are ready for sale, and it appears on the balance sheet as part of current assets.
A current asset is any asset expected to be converted into cash, sold, or consumed within one year or within the company’s operating cycle, whichever is longer. Merchandise inventory fits this definition because it is typically sold within a short period as part of the company’s regular operations. For retail or wholesale businesses, merchandise inventory represents a major portion of their total assets and is essential for generating revenue.
This classification is important for financial analysis. By identifying inventory as a current asset, analysts and stakeholders can assess a company’s liquidity and operational efficiency. It affects financial ratios like the current ratio, which evaluates a firm’s ability to meet short-term liabilities using its short-term assets.
The other options are incorrect for specific reasons. Option a is wrong because supplies the company will use in the future are typically categorized as prepaid expenses or supply assets, not merchandise inventory. Option b is incorrect because a long-term asset refers to items such as property, plant, and equipment, which are used over multiple years. Option d is also incorrect since investments represent financial assets like stocks, bonds, or ownership interests in other companies, not physical goods held for sale.
Therefore, classifying merchandise inventory correctly as a current asset ensures accurate financial reporting and helps stakeholders understand the company’s short-term financial health and operational status.