Final answer:
The statement that the gross profit percentage reflects a business's ability to earn profit on selling merchandise inventory is true. It represents the proportion of money left over from revenues after accounting for the cost of goods sold.
Step-by-step explanation:
The statement that the gross profit percentage reflects a business's ability to earn a profit on selling merchandise inventory is true. The gross profit percentage is a financial metric used to assess the financial health and performance of a business. It is computed by taking the gross profit (total revenue from selling merchandise inventory minus the cost of goods sold) and dividing it by the total revenue, then multiplying by 100 to get a percentage.
Gross Profit Percentage = (Gross Profit / Total Revenue) x 100
The higher the gross profit percentage, the better the company is at selling its merchandise at a profit above the cost of goods sold. This means the company has a good control over its production costs and pricing strategy. Conversely, a low gross profit percentage might indicate that the cost to produce or purchase the inventory is too close to the selling price, squeezing the potential profit margins.