Meaning:
Inventory is the collection of unsold products waiting to be sold. Inventory is listed as a current asset on a company's balance sheet.Inventory can be defined as tangible property held for sale in the ordinary course of business, or in the process of production for such sale, or for consumption in the production of goods and services for sale, including maintenance supplies and consumables other than machinery spares.
HOW IT WORKS (EXAMPLE):
Inventory is commonly thought of as the finished goods a company accumulates before selling them to end users. But inventory can also describe the raw materials used to produce the finished goods, goods as they go through the production process (referred to as "work-in-progress" or WIP), or goods that are "in transit."
There are generally five reasons companies maintain inventories:
The basic requirement for counting an item in inventory is economic control rather than physical possession. Therefore, when a company purchases inventory, the item is included in the purchaser's inventory even if the purchaser does not have physical possession of those items.
Inventory is usually classified in its own category as an asset on the balance sheet, following receivables. It is important to note that the balance sheet's inventory account should also reflect costs directly or indirectly incurred in making an item ready for sale, including the purchase price of the item as well as the freight, receiving, unpacking, inspecting, storage, maintenance, insurance, taxes, and other costs associated with it.
There are generally five reasons companies maintain inventories:
- To meet an anticipated increase in demand;
- To protect against unanticipated increases in demand;
- To take advantage of price breaks for ordering raw materials in bulk;
- To prevent the idling of a whole factory if one part of the process breaks down; and,
- To keep a steady stream of material flowing to retailers rather than making a single shipment of goods to retailers.
The basic requirement for counting an item in inventory is economic control rather than physical possession. Therefore, when a company purchases inventory, the item is included in the purchaser's inventory even if the purchaser does not have physical possession of those items.
Inventory is usually classified in its own category as an asset on the balance sheet, following receivables. It is important to note that the balance sheet's inventory account should also reflect costs directly or indirectly incurred in making an item ready for sale, including the purchase price of the item as well as the freight, receiving, unpacking, inspecting, storage, maintenance, insurance, taxes, and other costs associated with it.
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