What Is Inventory?
Inventory is the goods a business holds for sale, along with the raw materials and work-in-process used to produce them. It's recorded as a current asset on the balance sheet and becomes cost of goods sold when the items are sold.
What inventory is and why it matters
For any business that sells physical products, inventory is often the largest current asset and a major use of cash. It spans three stages: raw materials, work-in-process, and finished goods. How inventory is valued directly affects reported profit, because the value assigned to what's sold becomes COGS. The main methods — FIFO (first-in, first-out), LIFO (last-in, first-out), and weighted average — can produce different COGS and profit figures in periods of changing prices. Managing inventory well balances having enough to sell against the cash and storage cost of holding too much.
A worked example
A retailer using FIFO buys 100 units at $10 in January and 100 units at $12 in February, then sells 120 units in March. Under FIFO, the first 100 sold cost $10 each and the next 20 cost $12 each, so COGS = (100 × $10) + (20 × $12) = $1,240. The remaining 80 units, valued at $12 each ($960), stay in ending inventory on the balance sheet. A different method would assign different costs and change reported profit.
How firms handle it today
Firms track inventory quantities and values, apply a consistent valuation method, and reconcile physical counts to the books at period-end so COGS and the balance sheet are accurate.
Related terms
- COGS
- Current asset
- Balance sheet
- Gross margin
- Working capital
FAQ
Is inventory an asset?
Yes — it's a current asset until sold, at which point its cost moves to cost of goods sold on the income statement.
What are the main inventory valuation methods?
FIFO, LIFO, and weighted average — each can produce different COGS and profit when prices change.
What are the three types of inventory?
Raw materials, work-in-process, and finished goods.