Merchandise Inventory

Merchandise inventory is the goods owned by the business organization which are held for sale to the consumers.  In a trading form of business organization, the primary function of the business is the sale of a product. At the end of the accounting period for this form of business it was necessary to determine the value of the ending merchandise inventory. Expressing the value of the inventory on the balance sheet and the income statement was illustrated, with particular emphasis placed on the procedures used to determine the cost of goods available for sale and the cost of the goods sold.

Merchandise inventory was defined as the cost of the goods on hand as of the date the inventory was taken.  We have illustrated the taking of the inventory at the end of the accounting period. The valuation of the inventory taken is based on its cost. Keep in mind that merchandise inventory presents only those assets that were acquired exclusively for the purpose of resale in the normal course of business. The taking of an inventory of supplies on the other hand was for the purpose of converting an asset on the books to an expense to the extent those supplies had been used up.

The effects on net income, current assets and proprietor’s capital of incorrectly determining the ending merchandise inventory could be summarized as follows:

An overstatement of ending merchandise inventory causes:

• Understatement of cost of goods sold.
• Overstatement of net income
• Overstatement of current assets
• Overstatements of proprietor’s capital.

An understatement of ending merchandise inventory causes:

• Overstatement of costs of goods sold.
• Understatement of net income.
• Understatement of current assets.
• Understatement of proprietor’s capital.

Remember than an incorrectly stated ending inventory not only affects the current accounting period, but will also have an adverse effect on the next accounting period in regards to the statement of current assets, proprietor’s capital and the determination of the net income.

Questionnaire:

• What is Merchandise Inventory?
• Define Merchandise Inventory?