Inventory is goods held for sale, work in production, or materials and supplies used to produce goods or services.
Inventory is an asset consisting of goods held for sale, goods in production for sale, or materials and supplies expected to be consumed in production or service delivery. Its accounting connects purchasing and production costs on the balance sheet with cost of goods sold when the related goods are sold.
| Category | Description |
|---|---|
| Raw materials | Inputs awaiting use in production |
| Work in progress | Partly completed goods and allocated conversion costs |
| Finished goods | Completed products awaiting sale |
| Merchandise | Goods purchased for resale without further production |
| Supplies | Items consumed in production or service delivery when they meet the applicable inventory definition |
Inventory cost generally includes purchase costs, conversion costs, and other costs required to bring inventory to its present location and condition. Abnormal waste, many storage costs, selling costs, and unrelated administrative overhead are generally not included under IFRS, though exact treatment depends on the applicable framework and facts.
Cost is assigned using an accepted cost-flow method, such as FIFO or weighted average. U.S. GAAP and IFRS do not permit exactly the same methods in every circumstance, so policy notes matter when comparing companies.
Assume a retailer holds 10 units that cost $20 each, for total recorded cost of $200. Because the product is obsolete, management now expects to sell the units for $10 each and incur $2 per unit of selling costs. Under a simplified net realizable value calculation:
If the applicable accounting rules require measurement at the lower of cost and net realizable value, the inventory is written down from $200 to $80, producing a $120 expense. The real analysis must use supportable selling-price, completion-cost, and selling-cost estimates.
| Statement | Typical effect |
|---|---|
| Balance sheet | Unsold inventory remains an asset, net of required write-downs |
| Income statement | Inventory cost becomes cost of goods sold when related revenue is recognized |
| Cash flow statement | Inventory purchases affect operating cash flow, directly or through working-capital adjustments |
| Notes | Policies may describe cost formulas, write-downs, pledged inventory, and expense recognition |
Turnover is not a universal score. Grocery, manufacturing, luxury goods, and seasonal retail businesses naturally carry different levels and types of inventory. Acquisitions, inflation, stockouts, supplier constraints, and cost-flow methods can also change the ratio.
This article is educational and does not provide accounting, audit, tax, legal, inventory-management, or investment advice.