Merchandise inventory: Multiple Choice
Is a long-term asset.
Is a current asset.
Includes supplies the company will use in future periods.
Is classified with investments on the balance sheet.
Must be sold within one month.
The Correct Answer and Explanation is :
The correct answer is: Is a current asset.
Explanation: Merchandise inventory refers to the goods that a company purchases with the intention of selling them to customers in the normal course of business. It represents the items held for sale, such as finished goods, and is classified as a current asset on the balance sheet.
Why is Merchandise Inventory a Current Asset?
Current assets are assets that are expected to be converted into cash or used up within one year or within the company’s operating cycle, whichever is longer. Merchandise inventory is classified as a current asset because it is expected to be sold, used, or otherwise converted into cash in the near term—typically within the company’s operating cycle, which usually is less than a year.
- Inventory and Operating Cycle: The operating cycle refers to the time it takes for a company to buy inventory, sell it, and receive cash from customers. Merchandise inventory is part of this cycle, as it is purchased for resale and will be sold to customers within a short period (typically within a year or less). Hence, it meets the definition of a current asset.
Why the Other Options Are Incorrect:
- Is a long-term asset: This is incorrect because long-term assets (also known as non-current assets) are those that are expected to provide benefits for more than a year. Merchandise inventory is intended for sale in the near future, so it cannot be classified as a long-term asset.
- Includes supplies the company will use in future periods: This is incorrect because supplies are typically classified separately from inventory. While supplies may be used in future periods, they are usually categorized as current assets but distinct from merchandise inventory.
- Is classified with investments on the balance sheet: This is incorrect because investments are classified as non-current assets if they are held for more than a year, or current assets if they are expected to be sold or converted to cash within a year. Merchandise inventory is a separate category and not part of investments.
- Must be sold within one month: This is incorrect because inventory must typically be sold within the company’s normal operating cycle, which may vary, but it’s not strictly required to be sold within one month.
Thus, merchandise inventory is classified as a current asset because it will be sold within the normal operating cycle of the business.