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, expected to be sold and converted into cash within twelve months.

It's typically broken into three layers reflecting where goods are in the production process: raw materials, inputs not yet entered into production, work in progress, partially completed goods still on the factory floor, and finished goods, completed products ready for sale. For a retailer the distinction collapses to a single category of merchandise purchased for resale, while for a services business inventory is largely absent, 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, meaning it's written down when the expected selling price falls below the carrying cost but never written up above its original cost when values rise, an inherent conservatism in how the asset is reported. IFRS does allow an earlier writedown to be reversed, up to that original cost, while US GAAP does not.

Inventory turnover, 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, and 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.