Glossary
Inventory
Goods a company holds for sale, plus raw materials and work in progress; a current asset on the balance sheet.
Inventory is the goods a company holds to sell, along with the raw materials and partly finished products (work in progress) that will become those goods. It sits among current assets on the balance sheet. For retailers, manufacturers and distributors it is often one of the largest assets, and how fast it turns into sales says a lot about demand and management.
How inventory is valued
When identical items are bought at different prices, the company needs a rule for which cost moves to the income statement as cost of goods sold. FIFO (first in, first out) expenses the oldest costs first. LIFO (last in, first out) expenses the newest costs first; it is allowed under US GAAP but not under IFRS. A weighted-average method blends them. When prices are rising, LIFO produces higher cost of goods sold, lower reported profit and lower taxes than FIFO. Inventory is also written down if its market value falls below cost, for example when products become obsolete.
Inventory turnover
What to watch for
Inventory growing faster than sales for several quarters can signal weakening demand and future discounting or write-downs. Comparisons only make sense within an industry: a grocer may turn inventory more than ten times a year, while a jeweler or aircraft maker turns it far more slowly.