Final answer:
Merchandise inventory includes finished goods, work in progress, and raw materials, but not employee salaries, which are an operating expense. Inventory levels are indicators of a business's sales performance, with rising levels potentially signifying slower sales and falling levels indicating better than expected sales.
Step-by-step explanation:
Merchandise inventory is an accounting term that refers to the goods available for sale to customers by a business. It includes several categories of goods but does not encompass all business expenses. Specifically, merchandise inventory includes A) Finished goods, which are completed products ready for sale, B) Work in progress, which are goods that are in the process of being manufactured but are not yet complete, and C) Raw materials, which are basic materials that will be used in the production of goods. However, it does not include D) Employee salaries, as these are considered an operating expense rather than a part of inventory. The exclusion of employee salaries is based on the understanding that inventories reflect goods that are on hand and unsold, not the cost associated with creating them.
When assessing the health of a business, inventory levels can be a key indicator. A sudden increase in inventory levels may suggest that products are not selling as expected, leading to excess stock. Conversely, if inventory levels decline, it might indicate better than expected sales and efficient inventory management.