Final answer:
The item representing an expense paid in advance that creates future benefits is prepaid expense. These are recorded as assets on the balance sheet and expensed over the time they provide benefit.
Step-by-step explanation:
The item that represents an expense paid in advance that creates benefits used in the future is A. prepaid expense. Prepaid expenses are payments made for goods or services to be received in the future. This can include things like insurance policies, rent, or service contracts. These payments are recorded as assets on a company's balance sheet and are expensed over the period of use or benefit, aligning the expense with the corresponding revenue.
For example, if a business pays for a one-year insurance policy upfront, this is considered a prepaid expense. Although the payment is made in one period, the insurance coverage extends over the forthcoming year, and thus the benefit is recognized over that period as well.
An explanation of the other options: B. inventory is merchandise purchased to sell to customers, C. accounts receivable represents money owed to the business by customers, and D. cash equivalents are short-term, highly liquid investments that can be converted quickly to cash.