Inventory

Definition

Inventory refers to the goods and materials that a business holds for the purpose of resale. It is considered a current asset on the balance sheet since it is expected to be sold within a year.

5 Must Know Facts For Your Next Test

1. Inventory is classified as a current asset on the balance sheet.
2. It includes raw materials, work-in-progress, and finished goods.
3. The valuation of inventory can significantly affect a company's financial statements and profitability.
4. Common methods for inventory valuation include FIFO (First-In, First-Out), LIFO (Last-In, First-Out), and Weighted Average Cost.
5. Inventory turnover ratio measures how efficiently a company turns its inventory into sales.

Review Questions

• How is inventory classified on the balance sheet?
• What are the common methods used for valuing inventory?
• Why is inventory turnover ratio important in financial accounting?

Related terms

currentAsset: An asset that is expected to be converted into cash or used up within one year.

FIFO:

An inventory valuation method where the oldest inventory items are recorded as sold first.

inventoryTurnoverRatio: A measure of how many times a company's inventory is sold and replaced over a period.