Multiple Choice
Which of the following best describes what is included in merchandise inventory for a merchandising company?
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5. Inventory
Merchandising Company vs. Manufacturing Company
Multiple Choice
In a manufacturing company, Finished Goods Inventory is reported on which financial statement?
A
Balance sheet (as a current asset, unless expected to be sold beyond one year)
B
Income statement (as an operating expense)
C
Statement of cash flows (as an operating cash inflow)
D
Statement of retained earnings (as an adjustment to beginning retained earnings)
Verified step by step guidance1
Step 1: Understand the nature of Finished Goods Inventory. It represents the cost of products that have been completed but not yet sold by the company.
Step 2: Recall the purpose of each financial statement: the Balance Sheet shows assets, liabilities, and equity at a point in time; the Income Statement shows revenues and expenses over a period; the Statement of Cash Flows shows cash inflows and outflows; the Statement of Retained Earnings shows changes in retained earnings.
Step 3: Determine where inventory is classified. Since Finished Goods Inventory is an asset that the company owns and expects to sell, it is reported as a current asset on the Balance Sheet.
Step 4: Recognize that Finished Goods Inventory is not an expense, so it does not appear on the Income Statement as an operating expense.
Step 5: Understand that inventory does not directly affect cash flows or retained earnings adjustments, so it is not reported on the Statement of Cash Flows or the Statement of Retained Earnings.
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