What is inventory? Well, it’s just stuff you have for sale...in one form or another.
An auto dealer? All those cars sitting out there in the sun as dive bombing targets for the birds...yep, they’re inventory to the car dealership. The loads of nose hair trimmers sitting on the shelves at The Well Appointed Nostril? Yep, they’re inventory...albeit gross-ish inventory (especially after use). The 4,000 yards of denim cloth sitting in the weaving factory waiting for 13-year-old girls in Thailand to weave all together to make Levi’s for The Gap? Yep, that cloth is inventory (it isn’t finished inventory...it’s just a work in process).
All this inventory is an asset for the company who owns it, and is held as inventory...a work in process on that side of the balance sheet. Right there. And when it’s sold and turned into revenues, it’ll just become part of the expenses line on the income statement, usually as COGS or cost of goods sold.
So what are average inventories?
Well, inventory changes all the time, or at least the dollar value of the inventory at your little company, MoreOnTop Inc. So if you sell gallon jugs of BaldSpotKiller, some days you'll have 5,038 jugs. Then you sell a hundred, leaving you with 4,938 jugs. Then you'll finish that quarter with, say, 5,203. But then the next quarter you plunder your inventory to make room for the new Turbo model. Inventory declines to just 3,027 jugs. Then in the next quarter you finish plundering down to 1,938. And in the last quarter of the year you "restock" and add a bunch to inventory to bring total gallon jugs on your storage shelves to an even 5,000.
So with inventory having moved all over the place, you need a kind of trailing annual average for what you've held and in most cases, you'd just take whatever your quarter-end snap shots were...take an arithmetic average...and that number gives the best indicator of how well or poorly your year was. Things like ROA revolve around inventory so they're an important beast.
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Finance: What is work-in-process invento...3 Views
finance- a la shmoop. what is work-in-process inventory? your company
junk in the trunk makes enema kits for Elephants . what they get stopped up too. [tower with "junk in the trunk" written on it]
just need you know big bags. anyway so you've extruded ten thousand bags. you
need ten thousand giant hooks to hang the bags on palm trees and ten thousand
tube thingies for the you know de new mall. they cost you a total of 60 grand
to produce and are not yet packaged. the product isn't finished.
in fact the rubber hosing and so on has to be made of a special material that
takes three months to fully dry. you know that African climate is hell on rubber.
you also have four tons of rubber in blocks sitting around the factory floor [ants crawl across the floor]
with ants singing to it. and you have a mile of wire you'll eventually Bend into
bag hanging hooks it's just sitting in a coil.
alright you paid for the rubber blocks, and the wire already it's just sitting
there so these elements of product are in process. the product isn't finished
completed or ready to ship. so work in process inventory really just consists
of raw materials at various stages of production. and you know generally work
in processes just sitting on the factory floor versus out the door when it then
becomes a finished goods. and just remember that concept for you next time
you're unpacking a pachyderm. [woman in white coat peeks out from behind an elephant]
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