Inventory is the term used in business for raw materials, the in-process goods and the finished products that are treated as the assets of that business, which are ready or will be ready soon for sale.
The inventories turnover is one of the primary revenue generation sources and hence inventory is an important business asset. It is also a major source of the shareholder’s subsequent earnings. One of the vital functions of inventory is that, it allows the smooth functioning of the production process.
Components of Inventory
There are four component:
- Raw Materials: These are the basic material for a business’ manufacturing process. For instance, for a furniture company wood is a raw material.
- Work-in-Progress: The raw materials which are in process of becoming finished goods, through the manufacturing process are referred work-in-progress. For instance, a wooden table in making.
- Finished Products: The products which have been completed and are ready for selling.
- Merchandise: These are the finished products which are purchased by a wholesaler or a supplier and are ready for resale.
The inventories can be located in three main places, which are:
- In a company’s storage
- In transit
- On consignment
The inventories owned by the customer is not meant to be recorded as a business’ inventory. Similarly, the inventories owned by the supplier which is being held on the premises of a business, is also not recorded as the inventory of the business.
