Both the raw materials utilized in production and the finished goods that are ready to sell are referred to as inventory. It is defined as the collection of raw materials or finished products kept by a business in its operating cycle. Inventory is among a company’s most valuable assets because inventory turnover is one of the key sources of revenue production and resulting in the company’s shareholders’ earnings.
On a company’s balance sheet, it’s classified as a current asset. It also acts as a buffer between the manufacturing process and the order fulfillment process. The carrying cost of an inventory item is transferred to the income statement’s cost of goods sold (COGS) category when it is sold.
To put it another way, these products and resources are only used in the firm to sell to clients for a profit. They aren’t utilized to make products or to advertise businesses. The primary objective of these current assets is to make a profit by selling them to consumers, but just because something is for sale does not really mean it is always considered as in inventory.
The assets must first be related to the company’s main operation. Second, the assets must be ready to sell or be available to sell soon. They are really not inventory if some company assets could be sold but have never been made available for sale. These are merely the company’s assets and investments. Third, the assets must be owned with the intention of selling them to customers.