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.

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.

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.

Many producers partner with retailers to consign their inventory. Consignment inventory is the inventory owned by the supplier/producer (generally a wholesaler) but held by a customer (generally a retailer). The customer then purchases the inventory once it has been sold to the end customer 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.

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