Inventories Definition and Explanation

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Quick Definition

The value of products in storage a company intends to sell, or are to be used in the production of products to sell.

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Explanation of Inventories

Listed on the Balance Sheet, Inventories are the products the company intends to sell, or what is used in the manufacture or fulfillment of products or services they intend to sell. A retail company will usually simply list their inventories as the products they will be selling. For manufacturing companies, Inventories might be broken down into three different types of Inventories:

1. raw materials
2. work-in-process
3. finished goods

Importance of Inventories

Watch Inventories closely. You may at first think that a company with large Inventories is a good thing as they would be ready for any unexpected increase in sales, when in fact companies with large inventories may be a sign of poor efficiency in their retail, manufacturing, or general business processes.

When a company purchases products for retail, or items that will eventually be made into finished goods, this is money that is no longer cash – money that could be instead invested to gain a return. So instead of having cash invested that would be generating revenue on its own, the company would be buying items that will simply be stored. Even worse, these items would be taking up building space, which the company bought or leases and which is often heated or cooled.

Depending on the type of inventory, spoilage of the inventory may occur – and the cash the company spent on this inventory would be wasted.