What is Inventory

Inventory is the term for the goods available for sale and raw materials used to produce goods available
for sale. Inventory represents one of the most important assets of a business because the turnover of
inventory represents one of the primary sources of revenue generation and subsequent earnings for the
company's shareholders.

BREAKING DOWN Inventory

Inventory is the array of finished goods or goods used in production held by a company. Inventory is
classified as a current asset on a company's balance sheet, and it serves as a buffer between
manufacturing and order fulfillment. When an inventory item is sold, its carrying cost transfers to the
cost of goods sold (COGS) category on the income statement.

Types of Inventory

Inventory is generally categorized as raw materials, work-in-progress, and finished goods. Raw materials
are unprocessed materials used to produce a good. Examples of raw materials include aluminum and
steel for the manufacture of cars, flour for bakeries production of bread, and crude oil held by refineries.

Work-in-progress inventory is the partially finished goods waiting for completion and resale; work-in-
progress inventory is otherwise known as inventory on the production floor. For example, a half-
assembled airliner or a partially completed yacht would be work-in-process.

Finished goods are products that have completed production and are ready for sale. Retailers typically
refer to this inventory as "merchandise". Common examples of merchandise include electronics, clothes,
and cars held by retailers.

Consignment Inventory

Many producers partner with retailers to consign their inventory. Consignment inventory is the
inventory owned by the supplier/producer but held by a customer. The customer purchases the
inventory once it has resold or once they consume it (e.g. to produce their own products). The benefit
to the supplier is that their product is promoted by the customer and readily accessible to end-users.
The benefit to the customer is that they do not expend capital until it proves profitable to them,
meaning they only purchase it when the end-user purchases it from them or until they consume the
inventory for their operations.

Valuing Inventory

Inventory can be valued in three ways. The first-in, first-out (FIFO) method says that the cost of goods
sold is based on the cost of the earliest purchased materials, while the carrying cost of remaining
inventory is based on the cost of the latest purchased materials. The last-in, first-out (LIFO) method
states that the cost of goods sold is valued using the cost of the latest purchased materials, while the
value of the remaining inventory is based on the earliest purchased materials. The weighted average
method requires valuing both inventory and the cost of goods sold based on the average cost of all
materials bought during the period.