Inventory - Overview

A whole book can probably be written on inventory, so I thought that for starters, I'll give a high-level overview.

I'm sure most of you can guess what inventory actually is: these are products that are sold by the company.  They are the "blood" of the organization - by selling these items, a company makes money.

Don't confuse inventory with fixed assets though - bought are tangible, but they're not the same at all.  Inventory is sold to make money, while fixed assets are held by the company for more than one year (usually) and help with the operations.  For example, a sowing machine could be considered inventory in a company that sells sowing machine, while it could be considered an asset in a company that sells t-shirts. 

Inventory can be found on a balance sheet, under "Current Assets".

An account called Cost of Goods Sold can be found on the income statement.

An important formula to remember (and of course, understand!) is as follows:

Beginning Inventory

+

Purchases of Inventory

- 

Cost of Goods Sold (I/S)

=

Ending Inventory (B/S)

By knowing 3 out of the 4 figures above, we can figure out the 4th number.  For example, if we know how much inventory we had at the beginning, how much inventory we purchased during the year, and what our ending inventory is, we can derive our cost of goods sold.