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The finished goods that are put up for sale as well as the raw materials required for production are both included in inventory. Inventory turnover is one of the most important assets a company can have because it is one of the primary ways to generate money and, consequently, profits for the firm's shareholders. The three categories of inventory include unfinished objects, raw materials, and items that are still being produced. On the balance sheet of a company, it shows up as a current asset.

Understanding Inventory

AlInventory is a necessary valued asset for all businesses. It is described as the assortment of completed items or raw materials that a company keeps on hand for use in day-to-day operations. Raw materials, also known as any resources used to manufacture finished items, work-in-progress (WIP), and finished goods, or those that are prepared for sale, are the three main types of inventory.

Inventory, which acts as a stopgap between production and order fulfillment, is categorized as a current asset on a company's balance sheet as previously said. The cost of goods sold (COGS) category on the income statement is where the carrying cost of an inventory item is transferred when it is sold.

There are three techniques to value inventory. Some techniques include:

  1. The first-in, first-out (FIFO) technique states that the price of the earliest purchased materials is used to determine the cost of the goods sold. On the other hand, the cost of the most recent materials purchased serves as the basis for the carrying cost of the remaining inventory.
  2. The last-in, first-out (LIFO) method asserts that the value of the remaining inventory is based on the earliest purchased resources, while the cost of items sold is valued using the cost of the most recent purchased components.
  3. The weighted average technique, which calls for valuing both inventory and COGS in accordance with the typical price of all commodities purchased throughout the course of the accounting period.

Types of Inventory

Keep in mind that raw materials, work-in-progress, and finished goods are the three main categories of inventory. Merchandise and supplies are categorized as additional categories of inventory by the IRS.

Unprocessed resources are utilized as raw materials to create goods.

Examples of raw materials include:

  • Making automobiles out of steel and aluminum
  • Crude oil kept by refineries
  • Flour for bread bakeries

Products that are partially done but still need to be finished and sold make up work-in-progress inventory. Production-floor stock is often referred to as WIP stock. Work-in-process inventory is frequently referred to as an incomplete boat or an airplane.

Finished goods are items that have finished the production process and are available for purchase.. This inventory is sometimes referred to as merchandise by retailers. Electronics, clothing, and automobiles are typical examples of products that shops hold.


  • Inventory includes both the items that are readily available for purchase as well as the raw materials needed to produce them.
  • It is listed as a current asset on a company's balance sheet.
  • Raw materials, work-in-progress, and finished goods are the three categories of inventory.
  • There are three different methods for valuing inventory: first-in, first-out; last-in, first-out; and weighted average.
  • Businesses can reduce inventory expenses by using inventory management when they produce or acquire commodities as needed.
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