Let's carefully analyze each of the provided statements in order to determine which one correctly explains what merchandise inventory is.
1. Statement: Merchandise inventory is an asset reported on the balance sheet and represents the cost of products purchased for sale.
- Analysis: Merchandise inventory is indeed an asset because it represents resources owned by the company. These resources (inventory) have been purchased with the intention of selling them to customers. As an asset, merchandise inventory is reported on the balance sheet, which shows the company's financial position at a particular point in time.
2. Statement: Merchandise inventory is an expense account reported on the income statement and contains the cost of products purchased for sale.
- Analysis: This statement is incorrect because merchandise inventory is not an expense account. While the cost of goods sold (which originates from inventory) is reported as an expense on the income statement, merchandise inventory itself is recorded as an asset on the balance sheet until the goods are sold.
3. Statement: Merchandise inventory is subtracted from net sales on the income statement to determine gross profit for the period.
- Analysis: This statement is incorrect because gross profit is calculated by subtracting the cost of goods sold (COGS) from net sales, not the merchandise inventory itself. COGS represents the cost of inventory that has been sold during the period.
4. Statement: Merchandise inventory is increased when products are sold to customers.
- Analysis: This statement is also incorrect because merchandise inventory decreases when products are sold. When sales occur, merchandise inventory is removed from the balance sheet and recorded as part of the cost of goods sold on the income statement.
Based on the analysis of each statement, the correct explanation for what merchandise inventory is:
- Merchandise inventory is an asset reported on the balance sheet and represents the cost of products purchased for sale.
Therefore, the correct statement is:
Merchandise inventory is an asset reported on the balance sheet and represents the cost of products purchased for sale.
