Inventory

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DEFINITION of 'Inventory'

The raw materials, work-in-process goods and completely finished goods that are considered to be the portion of a business's assets that are ready or will be ready for sale. Inventory represents one of the most important assets that most businesses possess, because the turnover of inventory represents one of the primary sources of revenue generation and subsequent earnings for the company's shareholders/owners.

INVESTOPEDIA EXPLAINS 'Inventory'

Possessing a high amount of inventory for long periods of time is not usually good for a business because of inventory storage, obsolescence and spoilage costs. However, possessing too little inventory isn't good either, because the business runs the risk of losing out on potential sales and potential market share as well.

Inventory management forecasts and strategies, such as a just-in-time inventory system, can help minimize inventory costs because goods are created or received as inventory only when needed.

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RELATED FAQS
  1. What is the formula for calculating the inventory turnover ratio in Excel?

    The inventory turnover ratio is used in fundamental analysis to determine the amount of times a company sells and replaces ... Read Full Answer >>
  2. How is inherent risk assessed by an auditor?

    Inherent risk is one factor, along with control risk, that an auditor uses to assess the risk of material misstatement associated ... Read Full Answer >>
  3. How does Free Cash Flow to the Firm (FCFF) measure money, time, and risk?

    Free cash flow to the firm, or FCFF, measures money and time through the use of short- and long-term assets and earnings ... Read Full Answer >>
  4. How is work in progress (WIP) typically measured in accounting?

    Work in progress, also known as work in process, is usually measured and categorized as a current asset or a long-term asset ... Read Full Answer >>
  5. What does inventory turnover tell an investor about a company?

    The inventory turnover ratio determines the number of times a company's inventory is sold and replaced over a certain period. ... Read Full Answer >>
  6. How do you analyze inventory on the balance sheet?

    In accounting, inventory represents a company's raw materials, work in progress and finished products. Financial professionals ... Read Full Answer >>
  7. What is the relationship between the cash ratio and liquidity?

    The relationship between the cash ratio and liquidity is that the cash ratio is one of three liquidity ratios used to compare ... Read Full Answer >>
  8. What is the difference between fixed assets and current assets?

    Fixed assets, also known as property, plant and equipment (PP&E), are tangible assets that a company expects to use for ... Read Full Answer >>
  9. What are direct costs of sales?

    Direct cost of sales, or cost of goods sold (COGs), measures the amount of cash a company spends to produce a good or a service ... Read Full Answer >>
  10. Does US GAAP prefer FIFO or LIFO accounting?

    Unlike the inventory reporting rules under the International Financial Reporting Standards, or IFRS, the generally accepted ... Read Full Answer >>
  11. How can Economic Order Quantity be used to lower inventory costs?

    Economic order quantity determines the optimal number of units a company should hold in its inventory. It determines the ... Read Full Answer >>
  12. What does the cash conversion cycle (CCC) tell us about a company's management?

    The cash conversion cycle (CCC) is a formula in management accounting that measures how efficiently a company's managers ... Read Full Answer >>
  13. How do you use Microsoft Excel to calculate liquidity ratios?

    As with most Excel financial ratios, liquidity ratio calculations require at least two data points from outside financial ... Read Full Answer >>
  14. What are the differences between period costs and product costs?

    Costs of business are categorized as period costs or product costs as far as financial accounting is concerned. These categorizations ... Read Full Answer >>
  15. What are the generally accepted accounting principles for inventory reserves?

    As with most matters related to generally accepted accounting principles (GAAP), accountants assigned with the task of applying ... Read Full Answer >>
  16. Is an earnings surprise priced into the opening value by market makers or does the ...

    An earnings surprise is an event where the earnings of a company are greater or lower than the predictions put forth by analysts, ... Read Full Answer >>
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