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Inventory

Reviewed by Sujaini | Updated on Oct 05, 2020

Catalogue

What Is Inventory?

Inventory is the term used for the goods available for sale and the raw materials used to manufacture products for sale. Inventory is one of a company's most valuable assets since inventory turnover is one of the critical sources of revenue generation and corresponding earnings for shareholders in the company.

Breaking Down Inventory

Inventory is the collection of finished products or items used in a company's production. Inventory is listed on a company's balance sheet as a current asset, and it acts as a buffer between manufacturing and order fulfilment.

On the income statement, when an inventory item is sold, it's carrying cost transfers to the cost of sold goods (COGS) category.

Stock can be measured in three ways.

  1. The first-in, first-out (FIFO) approach says the cost of the products sold is based on the value of the earliest materials purchased. In contrast, the carrying cost of the remaining inventory is based on the cost of the latest materials obtained.

  2. The last-in, first-out (LIFO) method states that the cost of the sold goods is estimated using the cost of the latest purchased materials. In contrast, the value of the remaining inventory is based on the earliest purchased material.

  3. The weighted average method requires both inventory valuation and the cost of goods sold based on the average price of all materials obtained over the period.

Special Considerations

A lot of producers are working with retailers to consign their products. Consignment inventory is the inventory owned by the supplier/manufacturer but held by a client. The consumer buys the inventory after it has been resold or used (e.g., to manufacture their products). The advantage to the supplier is that the customer promotes their product and that it is readily accessible to end-users.

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