To determine the correct equation that represents the cost flow of a merchandising company, let's analyze each option step by step.
1. Net purchases plus beginning inventory equals merchandise available for sale
- Net purchases: This represents the total cost of the inventory that has been purchased during a specific period.
- Beginning inventory: This is the value of the inventory that was available at the start of the period.
- When you add the net purchases to the beginning inventory, you get the total merchandise available for sale during the period.
2. Net purchases minus beginning inventory equals merchandise available for sale
- This equation implies that the merchandise available for sale is determined by subtracting the beginning inventory from the net purchases. This doesn't accurately reflect the inventory process since both beginning inventory and net purchases contribute to the total merchandise available for sale.
3. Beginning inventory plus cost of goods sold equals merchandise available for sale
- This equation is not accurate because the cost of goods sold (COGS) represents the value of the inventory that has been sold during the period. The merchandise available for sale should be the amount before any sales have occurred.
4. Net purchases plus cost of goods sold equals merchandise available for sale
- Similar to the previous option, the cost of goods sold should not be added to net purchases to get the merchandise available for sale. The cost of goods sold comes into play after determining the total merchandise available for sale to find out the ending inventory.
From these analyses, it's clear that option 1 is the correct equation that identifies the cost flow of a merchandising company:
Net purchases plus beginning inventory equals merchandise available for sale
Therefore, the correct choice is:
1
