Inventory

Inventory refers to the goods and materials that a business holds for use or sale. It typically includes raw materials, work-in-progress, finished goods, and maintenance, repair, and operating supplies (MRO). Proper inventory management seeks to balance availability and service with carrying costs and capital tied up in stock.

In accounting, inventory is a current asset valued at cost or net realizable value, whichever is lower. Common cost methods are first-in, first-out (FIFO), last-in, first-out (LIFO) (permitted under US GAAP but not IFRS), and weighted average. Some frameworks also apply a lower of cost and net realizable value rule, with write-downs and possible reversals in certain circumstances.

Inventory management uses techniques to optimize levels and costs. Just-in-time (JIT) reduces stock by aligning orders with production and demand. Economic order quantity (EOQ) estimates the optimal order size. ABC analysis classifies items by importance and turnover. Most organizations combine perpetual tracking with periodic verification, such as cycle counting.

Key performance indicators include inventory turnover and days of inventory on hand. Inventory faces risks such as obsolescence, shrinkage from theft or damage, spoilage, and demand variability. Effective forecasting, controls, and supplier relationships help mitigate these risks.

Inventory is essential across sectors, including manufacturing, wholesale, and retail. Efficient management supports customer service, lowers carrying costs, and improves cash flow by reducing excess and obsolete stock.