Definition
The financial accounting term inventory is used to describe the balance sheet line item that includes the value of raw materials, work in process, finished goods ready for sale, and returned goods that can be resold.
Calculation
The most common calculation of inventory is as follows:
Ending Inventory = Starting Inventory + Additions - Sales
Explanation
Inventory is one of the most important assets of a company. For manufacturers, inventory is sometimes the single largest current asset appearing on the balance sheet. It's considered a current asset since it can be sold and turned into cash in less than twelve months or one operating cycle, whichever is longer.
Valuing inventory is difficult since some of the items may still be a work in process. Typically, this may be left to management's discretion but conservative (low) estimates are favored by analysts and investors.
When items held in inventory become obsolete, or otherwise not sellable, a potential loss can occur. Inventory also ties up cash, an important resource to any company. This is why inventory management is a closely watched metric for many companies.
Related Terms
Also known as a statement of financial position, the balance sheet is used to show the financial health of a company at a particular point in time. The balance sheet consists of assets, liabilities, and owner's equity in the company. It is one of the four key financial statements issued by public companies.
Moneyzine EditorJanuary 8th, 2024
The direct expense a company incurs when making a product, or supplying a service, such as raw materials and labor are referred to as the cost of goods sold (COGS). Also referred to as the cost of sales, the cost of goods sold appears as a line item expense on the income statement.Moneyzine EditorJanuary 12th, 2024- The financial accounting term sales returns and allowances is used to describe the value of unsatisfactory merchandise returned by customers or refunds issued by the company to customers. Sales returns and allowances is found on a company's income statement.Moneyzine EditorSeptember 21st, 2023
The financial accounting term average cost refers to one of several acceptable approaches to inventory valuation. The average cost method uses a weighted average approach to determine the value of inventory appearing on the company's balance sheet.Moneyzine EditorJanuary 8th, 2024
The financial accounting term last-in, first-out refers to one of several acceptable approaches to inventory valuation. The last-in, first-out method assumes the newest items held in inventory are the first items to be sold when determining the value of this asset as it appears on a company's balance sheet.Moneyzine EditorJanuary 23rd, 2024
The financial accounting term first-in, first-out refers to one of several approaches to inventory valuation. The first-in, first-out method assumes the oldest items held in inventory are the first items to be sold when determining the value of inventory appearing on a company's balance sheet.Moneyzine EditorJanuary 18th, 2024
The financial accounting term gross profit method refers to an approach to valuing ending inventory which is based on an assumption the gross profit ratio on the items held in inventory remains consistent from one accounting period to the next.Moneyzine EditorJanuary 19th, 2024
The financial accounting term lower of cost or market refers to an inventory valuation rule that states items should be valued at their original cost or their current market cost, whichever is lower.Moneyzine EditorJanuary 24th, 2024
