Inventory refers to raw materials, finished products, and unfinished products. Inventory is an account on a balance sheet that keeps track of all of the items mentioned above. It is regarded as one of a company’s most important assets because it is the primary source of revenue generation.
Inventory is a current asset, but it cannot be converted into cash as easily as other current assets. As a result, it is excluded from the Quick ratio. Keeping inventory for extended periods of time is unprofitable due to storage costs and potential damage.
Inventory is calculated using these methods:
First in, First out: Considers that the oldest products are sold first
Last in, First out: Considers that the latest products are sold first.
Weighted-Average: Both COGS and inventory are valued based on the average cost of the products purchased during that period.