Merchandise inventory consists of goods acquired or held for sale in the ordinary course of business when this management classification is used. It differs by purpose from raw materials, which must first undergo production. If a trading organization bought one hundred ready-made kettles for resale, they are merchandise inventory; at a factory, a similar item may be equipment for its own use. Purpose is tested against the facts, not only the name of the item. The balance requires checking rights, cost and a possible reduction in the recoverable amount.
How to avoid an error
The resource’s role for the particular owner is important: an item being ready for use does not by itself make it merchandise. When reading financial statements, compare the balance with cost of sales and the speed of realization. Growing merchandise inventory when demand is absent can tie up cash even if the purchase price looks attractive.
For more on the connection between cost and write-downs: [educational analysis](/guides/inventory-cost-nrv/).
Sources and limits of review
Basis: **gl-mit-eoq**, **report-ias2**. The example is editorial. The sources check the concept, but they do not confirm the reliability of anyone’s financial statements or the suitability of a decision for a particular investor.
General educational models; IFRS is mentioned only to the stated extent; not a statement of current Russian rules.
Source references retained: gl-mit-eoq, report-ias2; one hundred ready-made kettles, resale versus factory use, raw-material distinction, rights, cost, recoverable-amount, cost-of-sales and realization-speed caveats, and the inventory-cost/NRV link preserved.
Educational material is not individual investment, legal or tax advice.
