Inventory: What Is It?

The raw ingredients that are used to make things and the finished goods that can be sold are both called inventory. One of a company’s most valuable assets is its inventory since its turnover is one of the main ways the company makes money and gives it to its owners. Materials that are still being made, already made, and finished goods are the three types of inventory. On a business’s balance sheet, it shows up as a current asset.

Getting to Know Inventory

Having inventory is an excellent thing for any business. It’s the sum of all the raw materials or finished things that a company keeps on hand as it runs its business. There are three main types of inventory: work-in-progress (WIP), finished goods, and raw materials. Work-in-progress (WIP) refers to supplies used to make completed goods.

As we already said, it is a present asset on a business’s balance sheet. It acts as a buffer between making things and fulfilling orders. The cost of an item in stock moves to the cost of goods sold (COGS) area on the income statement when it is sold.

The value of inventory can be found in three ways. These are the ways:

The first-in, first-out (FIFO) method says that the cost of goods sold (COGS) is based on the cost of the items bought the earliest. On the other hand, the carrying cost of the leftover stock is based on how much the most recent materials cost.

LIFOST (last-in, first-out) is a method. The cost of the most recent materials bought is used to determine the value of the COGS, while the cost of the earliest materials bought is used to determine the value of the leftover inventory.

The weighted average method means that inventory and COGS must be valued based on the average cost of all the materials bought during the time.

The inventory turnover of a business shows how many times it sells its goods in a certain amount of time. Managers, analysts, and investors can use this information. How quickly a company sells its stock can show if it has too much or too little on hand.

Unique Things to Think About

A lot of manufacturers work with stores to donate their goods. Inventory that is held by a customer (usually a store) but owned by the seller or producer is called consignment inventory. The customer then buys it after it has been sold to a final customer or used up (for example, to make their goods).

The seller benefits because the customer promotes their product and makes it easy for end users to find. The buyer benefits because they don’t have to spend money until it makes sense for them to do so. This means they only buy it when the final customer buys it from them or until they use up the stock for their business.

Different kinds of stock

Remember that it is divided into three groups: finished things, work-in-progress, and raw materials. Additional types of assets that the IRS recognizes are goods and supplies.1

Raw materials are used to make a good but have not been treated. Here are some examples of raw materials:

• Steel and aluminum are used to make cars.
• Bread makers need flour to make bread.
• The oil that processors hold to be crude

Work-in-progress inventory is the goods that aren’t quite finished yet but are ready to be finished and sold again. Inventory on the working floor is another name for work-in-progress (WIP) inventory. A work-in-process inventory is often an airplane that is only partially put together or a partially finished boat.

Products that have been made and are now finished are called “finished goods.” They are ready to be sold. This stock is usually called “merchandise” by stores. Electronics, clothes, and cars that stores sell are all common examples of goods.

Management of Inventory

Sometimes, it’s not good for a business to keep many products on hand for a long time. That’s because it comes with problems, like the cost of keeping, spoilage, and the risk of becoming obsolete.

There are also problems with having too little supplies. For example, a business could lose market share and miss out on profits from sales that could have happened.

Companies can lower their inventory costs by using strategies and forecasts for inventory management, like a just-in-time (JIT) inventory system (with backflush costing). This is because goods are only made or acquired when they are needed.

Companies should always buy an exemplary method for keeping track of their inventory. This is especially true for more prominent companies with much store space and different product sales methods. Waste, low turnover, and fraud or theft can all be found by these methods.

Turnover of Inventory

The turnover of goods is an essential part of managing inventory. This metric tracks how often and how much of a company’s merchandise is sold, replaced, or used. It is also known as stock turnover. This number gives you an idea of how profitable a business is and whether any flaws must be fixed.

A key sign that can show whether inventory will move quickly or not is how much customer demand is. When demand is high, a company’s goods and services tend to move quickly off the shelves and into customers’ hands. When demand is low, on the other hand, goods and services tend to move slowly.

A company’s product turnover rate is often shown as a ratio. The following method is used to figure out the inventory turnover ratio:

Inventory Ratio = Cost of Goods Sold / Average Value of Stock

The company’s leaders can use this number to make essential choices, like whether to keep making certain goods and services or whether problems need to be fixed.

What Does “Inventory” Mean?

Inventory is the ready-to-sell goods and products that a business has and the raw materials used to make them. It can be divided into three groups: finished things, work-in-progress, and raw materials.

Regarding accounting, it is a present asset since the company usually plans to sell the finished goods within a year.

There are several ways to determine the value of the product: last-in, first-out, first-in, first-out, and the weighted average method.

What Does Inventory Look Like?

Take the example of a clothing store like Zara that has to change hours. 2 Because of fast fashion, Zara and other clothing stores are pressured to sell their stock quickly. Zara’s goods are an example of inventory almost ready to sell. On the other hand, fabric and other materials used for production are considered raw materials and kept in inventory.

Stock can tell you a lot about a business.

The rate at which a business turns over its stock is one way to measure its performance. Businesses that sell their stock faster than their competitors save money on keeping costs and missed opportunities. Because of this, they often do better than expected, which helps the company sell more things.

Conclusion

• Inventory includes the things that can be used to make more goods and those already made and ready to sell.
• It shows up on a company’s balance sheet as a current asset.
• There are three types of inventory: finished things, work-in-progress, and raw materials.
• There are three ways to determine how much an item is worth: the weighted average method, the first-in, first-out method, and the last-in, first-out method.
• Businesses can keep inventory costs low by managing their stock and only buying or making things when needed.