Inventory

Inventory is the value of goods a company holds for the purpose of sale or use in production. It sits in the current assets section of the balance sheet on the basis that it is expected to be sold and converted into cash within twelve months.

It is typically broken into three layers that reflect where goods are in the production process. Raw materials are inputs not yet entered into production. Work in progress are partially completed goods still on the factory floor. Finished goods are completed products ready for sale.

For a retailer the distinction collapses to a single category of merchandise purchased for resale. For a services business inventory is largely absent, which is one of the structural reasons service businesses generate cash more efficiently than product businesses.

Inventory is carried on the balance sheet at the lower of cost or net realisable value under both GAAP and IFRS. This means it is written down when the expected selling price falls below the carrying cost but is never written up when values rise, creating an inherent conservatism in how the asset is reported.

Inventory turnover, calculated as cost of goods sold divided by average inventory, and its inverse days inventory outstanding measure how efficiently a company is managing its stock. Rising days inventory outstanding signals slowing demand, obsolescence risk, or supply chain misalignment. A sudden inventory build relative to revenue growth is one of the earliest and most reliable indicators of demand weakness in manufacturing and retail businesses.