Multiple Choice
A key difference between a master budget prepared for a merchandiser versus a manufacturer is:
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5. Inventory
Merchandising Company vs. Manufacturing Company
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Which of the following is classified as merchandise inventory on a merchandising company's balance sheet?
A
Raw materials used in production
B
Work in process inventory
C
Factory equipment
D
Finished goods purchased for resale
Verified step by step guidance1
Understand the concept of merchandise inventory: Merchandise inventory refers to goods that a merchandising company purchases with the intention of reselling them to customers. It is classified as a current asset on the balance sheet.
Analyze the options provided: Raw materials, work in process inventory, and factory equipment are typically associated with manufacturing companies, not merchandising companies. These items are part of the production process and are not purchased for resale.
Focus on the correct answer: Finished goods purchased for resale are directly classified as merchandise inventory because they are ready for sale to customers without requiring further processing.
Relate the classification to the balance sheet: Merchandise inventory is reported as a current asset because it represents goods that are expected to be sold within the normal operating cycle of the business.
Conclude the reasoning: The correct classification aligns with the nature of a merchandising company, which buys and sells finished goods rather than manufacturing them. This distinction is key to understanding the balance sheet presentation.
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