Inventory

From Financial Literacy Wiki

Inventory is a list for goods and materials, or those goods and materials themselves, held available in stock by a business.

There are three basic reasons for keeping an inventory:

1. Time - The time lags present in the supply chain, from supplier to user at every stage, requires that you maintain certain amount of inventory to use in this "lead time"
2. Uncertainty - Inventories are maintained as buffers to meet uncertainties in demand, supply and movements of goods.
3. Economies of scale - Ideal condition of "one unit at a time at a place where user needs it, when he needs it" principle tends to incur lots of costs in terms of logistics. So bulk buying, movement and storing brings in economies of scale, thus inventory.

In accounting, there are two methods of handling Inventory and they are called "First In First Out" (FIFO) and "Last In First Out" (LIFO).

For manufacturing firms, their inventory can be broken down into several categories depending on the manufacturing progress but they can be broken down into three main categories and they are

1. Finished Goods
2. Work-In-Progress
3. Raw Materials