Inventory is a part of non-current assets of the company and as such it is presented in the current asset portion of the balance sheet or statement of financial position. It is also called stock in various parts of the world.

Inventory may be raw material, work in process and finished goods which is either kept for sale or is used in the production of goods or rendering of services.

Types of Inventory

There are three types of inventories:

Raw material

This is the inventory which company buys from outside market. It is the basic component over which company performs various activities to produce the finished goods. It is kept in warehouses.

Work in Process

When the warehouse supervisor issues raw materials to the production department, this inventory is called work in process (WIP) inventory. This type of inventory is very common in manufacturing companies.

Finished Goods

This type of inventory is the final product of the manufacturing process. This is the inventory which is sold in the market. 

Inventory Valuation Methods

Closing Inventory may be valued using different methods:

  1. FIFO (First in first out)
  2. LIFO (Last in first out)
  3. Specific Identification method
  4. Gross margin method
  5. Lower of Cost and Net Realizable Value
  6. Replacement price method
  7. Standard price method
  8. Weighted Average method
  9. Retail method

Inventory Management Systems

Perpetual System

Periodic System

Difference between Perpetual and Periodic System

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