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Valuing inventory helps companies manage cost flow assumptions associated with stock and stock repurchases. It is important to consistently and accurately assign costs to inventory. While merchants may handle minor assembly, packaging, shipping, or delivery, these activities are not classified as 'manufacturing'. The main difference between manufacturing inventory and merchandise inventory is that merchandise inventory has already completed the manufacturing process before reaching the merchant or retailer, whereas manufacturing inventory requires additional processing. Inventory that consists solely of finished goods is known as merchandise. This typically includes retailers, wholesalers, or distributors that purchase finished goods to sell to third parties at a higher price. Inventory for retailersįor businesses without a production process, it is not necessary to categorise inventory. For example, a seller’s finished goods may become a buyer’s raw materials, and while many manufacturers address work in process, it might not be necessary for businesses with short production processes. These categories can vary between manufacturers. Finished goods: completed products that are ready to be sold to customers.Work in process: partially completed goods.Raw materials: items used by a company in the production of goods.Manufacturers usually have three categories of inventory that reflect the various stages of the production process: Inventory can be broken down into sub-categories depending on the business’s supply chain and the nature of the goods or services sold. Categories of inventoryĪlthough inventory is usually recorded on the balance sheet under one single line called 'Inventory', stock takes various forms. On the other hand, too little inventory can cause a business to miss sales opportunities and lose customers. Too much inventory can lead to disruptions in production, additional expenses (such as storage and insurance costs), issues with cash flow, and financial losses – for example, if the inventory items expire or become obsolete. It is therefore important to implement effective stock management in order to free-up capital.īusinesses need to closely monitor inventory to achieve the right levels of stock. Sometimes referred to as stock, inventory represents tied-up capital. Inventory should be reported as a short-term or current asset as it is usually liquidated (turned into cash) within a year. Inventory includes goods ready for sale as well as any physical resources used in the production of the finished products. Inventory is a major company asset, keep track of your business assets with Debitoor invoicing software.
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It is often one of the main sources of a company's revenue. Inventory is an asset that is sold throughout the ordinary course of business.