Inventory – What is Inventory?

What is a company’s Inventory?

 

Inventories are a company’s completed product waiting to be sold, partially completed products and raw materials used to create those products.

The value of the company’s inventory can be found on the company’s balance sheet statement located in the 10 – K or 10 – Q filing. Inventory is listed under current assets because it is expected to be sold within 1 year.

 

Example below from Intel’s (INTC) 2012 2nd quarter earnings, which can be found on the SEC’s website here.

 

(click image to enlarge)

 

A company must carefully weigh how much inventory to keep on hand. A company does not want to keep too much in inventory, because it could lead to loss, increased costs of storage or become outdated. However, a company wants to have enough inventories on hand to be able to meet all the orders for its products. How fast a company converts inventory into cash is one important measure of a company’s efficiency.

 

 

 

Inventory is used in several calculations and ratios used to determine a company’s short term financial health. We have one example in our guide on using Inventory Ratios to analyze your next investment, where we take a deep dive into the components of a company’s inventory and determine what that can tell investors.

 

 

Current Ratio = Current Assets ÷ Current Liabilities

 

Working Capital = Current Assets – Current Liabilities

 

Interpretation of Financial Statements, Defines this as:

“Current assets representing the present stock of finished merchandise, goods in process of manufacture, raw materials used in manufacture, and sometimes miscellaneous supplies such as packing and shipping material. Usually stated at cost or market value, whichever is lower.

 

Inventories comprise goods held for sale or in process of manufacture and materials and supplies used up and operating the business. The chief criterion of inventory soundness is the turnover, defined as the annual sales divided by the year end inventory. The comparison of inventory turnover among companies within an industry will in many cases reveal an important competitive advantage which marks the leading companies in the group.”

 

 


Financial Statements: A Step-by-Step Guide to Understanding and Creating Financial Reports, Defines this as:

“Inventory is both finished product for ready sale to customers and also materials to be made into products. A manufacturer’s inventory includes three groupings:

1. Raw material inventory is unprocessed materials that will be used in manufacturing products.
2. Work in process inventory is partially finished products in the process of being manufactured.
3. Finished good inventory is completed products ready for shipment to customers when they place orders.

As finished good inventory is sold it becomes an accounts receivable and then cash with the customer pays..”

 

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