What is Inventory or Stock?
Inventory (or stock) is a short term business asset of ‘stocks of goods’. These balances allow for the resale or trading or for using them to make, manufacture or produce a product for sale.
Inventory is classified as a current asset.
Asset items that are turned over during the current operating cycle are called current assets. In accounting terms that is usually one year.
Because inventory is a current asset as it is ‘turned over’ during the ‘operating cycle‘. The operating cycle is the continuing cycle of the turnover of buying stock, paying for it, selling and and receiving the sale payment.
The business needs to find the balance between holding some stock for future sales and not holding too much. However too much inventory will lead to excessive costs and storage requirements.
Ratios measure inventory turnover and can help calculate optimum inventory balances
What item was sold and what remains in the inventory stock?
This accounting choice gives rise to the different valuation methods of First In First Out (FIFO), Last in First Out (LIFO) and the Weighted Average method. Another option is for the inventory items may to be specifically identified.
To learn more about inventory take this Inventory Tutorial Course Inventory Tutorial Course
Return toAccounting Questions and Answers