Question

Why are inventories included in the computation of net income?

a. To determine cost of goods sold.
b. To determine sales revenue.
c. To determine merchandise returns.
d. Inventories are not included in the computation of net income.

Answer 1

Inventories are included in the computation of net income to determine the cost of goods sold.

Inventories are included in the computation of net income to determine the cost of goods sold (option a). The cost of goods sold is an important expense for businesses and is subtracted from revenue to calculate net income. By including inventories in the computation, businesses can accurately determine their expenses and ultimately their net income.