Inventory
In this article, Shruti CHAND (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2022) elaborates on the concept of accounts receivable.
This read will help you get started with understanding inventory and its significance.
Definition
All the raw material that a business uses to produce goods and the ready for sale products that a business possesses is referred to as Inventory. It is a form of asset for a business.
All inventory is categorised and recorded as current asset on the balance sheet. The inventory mainly comprises of three types of goods:
1. Raw materials: The assets that a business uses in the production process to produce the final product.
2. Work-in progress: The unfinished product held by a business not ready to be sold yet.
3. Finished goods: Ready to sell products possessed by a business not sold yet. These products are usually held by a business in warehouses.
The value of inventory is important to be evaluated by a business as it is an asset stored by the business which incurs costs of storage. The value of the inventory can be evaluated in various ways though, depending on the accounting method followed by the business.
The three ways in which inventory can be valued are as follows
1. FIFO: First in first out method which calculates the cost of goods sold on the basis of the cost of earliest purchased materials.
2. LIFO: Last in first out method states that the cost of the goods sold are calculated based on the value of the raw materials purchased last.
3. Weighted average method: States that the value of inventory is calculated based on the average cost of the total raw material purchased by the business.
Final Words
Understanding inventory and calculating it well helps the business to plan the purchase of raw materials and production decisions better. Business can determine the level of purchases to be made and exercise stock control for better business performance.
Relevance to the SimTrade certificate
This post deals with inventory part of the books of accounts, which is an important indicator for investors to study the financial health of a company.
About theory
- By taking the SimTrade course , you will learn more about the markets.
About practice
- By launching the series of Market maker simulations, you can extend your learning about financial markets and trading approaches.
Related posts on the SimTrade blog
▶ Shruti CHAND Balance sheet
▶ Shruti CHAND Accounts Receivable
▶ Shruti CHAND Current Assets
About the author
Article written in October 2021 by Shruti CHAND (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2022).