Meaning and Classification of Inventory

What Do You Mean By Inventory?

Inventory means in Accounts all the goods, items, materials, and merchandise that are held by a business so that it can sell them in the market and make a profit from them. The term inventory also refers to one of the major important factors of the business called the asset because they are the major turnover of the inventory. Inventory is also the primary source of the subsequent earnings and revenue generation that are available for the stakeholders of the company. Inventory refers to the finished goods that are held by any company.


Inventory And Its Types

Inventory is mainly categorized as work-in-progress, raw materials, and finished goods.

Raw materials refer to the various unprocessed materials that are used to make goods. Some of the examples of raw materials are steel and aluminium used for making cars, flour which is required for the production of bread in a bakery, and oil that are held by various refineries. 

Work-in-progress inventory refers to the goods that are finished partially and have been kept for resale and completion. The term is also known as the inventory present on any work floor. Examples include a yacht that is partially completed or an airliner that is half-assembled.  

It also refers to finished products that are the products already completed and are ready for marketing. They are ready for selling purposes and can be used by the consumers who purchase them. This inventory is also known as merchandise. Examples of such inventory include cars, furnished products, clothes, and electronics.


Inventory in Economics

Inventory plays an important and efficient role in the trading and manufacturing business and so the businessman needs to understand the importance of economics in the growth of an inventory. The inventory should be processed well to produce more products that result in the positive growth of the company.


Indirect Inventory 

It refers to the stock items necessary for the production of goods but they are not the direct component of those goods or products. Such goods can be ancillary goods that refer to the situation where the company cannot link them with final units of the finished goods. These indirect inventories form the distribution, selling as well as administrative purpose. The examples include oils and petrol that are used in indirect inventories. Office supplies also fall under indirect inventories. 


Live Inventory Meaning

Live inventory helps an individual to easily handle all the multiple channels by checking that they are up-to-date as well as accurate. This also refers to the selling process by increasing sales, stopping oversell, and giving confidence.


Inventory Means in Account 

Inventory accounting refers to the accounting that deals with the accounting and valuation changes that can be introduced in the inventoried assets. The inventory of a company generally deals with goods that involve three stages of production. Inventory accounting assigns values to all the items in the three stages and prepares them for sale. 


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FAQs (Frequently Asked Questions)

1. Give an inventory example.

There are many different shapes of the inventory examples depending on their position in the supply chain. Inventory is referred to as the commodity that is in its physical state in the process to become a product. For example, huge manufacturers can have their products in any of the stages of production. To report the total inventory to the stakeholders it should be present on the balance sheet with the work-in-progress, raw materials, and finished goods. This informs the stage of the inventory and helps the company to maximize the resources. 

2. What are direct inventories?

These types of inventories form the most important part of the finished goods. All the components that are part of the final product come under direct inventory. Also, another important factor of direct inventory is that one can easily assign stocks to the physical units. 

  • Raw materials- raw materials are used in the process of producing final goods. Raw materials are the goods in their initial composition. 

  • Semi-finished goods- they are known as goods that are in progress. They are not fully furnished or completed. 

  • Finished goods- these are goods that are completed and are ready for sale. 

3. What is inventory valuation?

Inventory valuation refers to the monetary amount that is linked to all the goods present in the inventory by the end of the accounting period. This valuation is based on the overall cost that is incurred to produce all the inventories and make them ready for sale. Inventories are probably the largest business assets of all. The method depends on the nosiness and its ability to track stock. Inventory is sold constantly as well as restocked. There are four methods of inventory valuation, they are:

  • Specific Identification

  • First-In, First-Out (FIFO)

  • Last-In, First-Out (LIFO)

  • Average cost