Inventory Definition

Inventory are goods being held and made available for sale.

Inventory is an item listed on a companys balance sheet and is classed a current asset. Inventory will consist of goods being held by the company that are expected to sell for profit in the next accounting period or within 12 months of recordation. Inventory is an important company asset as it will often be a main source of generating revenue, once an item within inventory is sold its holding costs are carried across as Costs of Goods Sold (COGS) on the income statememt.

To be classed as inventory the item/asset must be part of a companys primary business. The intention for holding inventory will be to make it available for sale or make it soon to be ready for sale. There are three types of inventory a company may have, which are:
Raw materials
Work-in-progress
Finished goods
Merchandise

Inventory is a key driver of a companys profitibaly and can mean for more subsequent earnings for its shareholders. The amount of inventory should correlate well to the company and meet its supply and demand requirements. Too little or a constant shortage of inventory can lead to loss of sales or delayed back orders. On the other hand, an excess of inventory can also be disadvantageous because of the storage costs involved when holding inventory. An excess of inventory for a company who deals short shelf life products or a seasonal product line can sometimes even result in loss of profit as they may be forced to sell them at cheaper prices to help lower inventory levels. A company may introduce safety margins to ensure the right level of inventory is always being held. In addition they may instead take up a just-in-time inventory management system.

The amount of inventory acts as an excellent complimentary figure that should certainly be used with other metrics when evaluating a company.

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