What is Inventory? and Types of Inventory

What is Inventory?

The dictionary meaning of Inventory is ‘stock of goods’, or a list of goods’. The word ‘Inventory’ is understood differently by various authors. In accounting language it may mean stock of finished goods only. In a manufacturing concern, it may include raw materials, work in process and stores,etc. To understand the exact meaning of the work ‘Inventories’ we may study it from the usage side or from the ‘side of point of entry’ in the operations. It may is the raw materials, work-in-process products and finished goods that are considered to be the portion of a business’s assets that are ready or will be ready for sale.

Definition of Inventories

International Accounting Standard Committee (I.A.S.C) defines Inventories as ” Tangible property:

  1. Held for sale in the ordinary course of business,
  2. In the process of production for such sale or,
  3. To be consumed in the process of production of goods or services for sale”.

The American Institute of Certified Public Account (AICPA) defines ” inventory in the sense of tangible goods, which are held for sale, in process of production and available for ready consumption”.

According to Bolten S.E., “It refers to stock-pile of product, a firm is offering for sale and components

Inventory Management

Inventories management is the management of inventory and stock. As an element of supply chain management, inventory management includes aspects such as controlling and overseeing ordering inventory, storage of inventory, and controlling the amount of product for sale.

Types of Inventories

There are three components typically classified under the Inventories account: raw materials, work in progress and finished goods.

Inventory types

On the Basis of Elements

  • Raw Materials: Raw materials represent goods that are used in the production as a source material. Examples of raw materials are metal bought by car manufacturers, food ingredients held by food preparation companies and crude oil held by refineries.
  • Work in Progress: Work in progress includes goods that are in the process of being transformed during manufacturing and are about to be converted into finished goods. For example, a half-assembled airliner or a ship that is being built would be work in process.
  • Finished goods:  These are products that have gone through the production and ready for sale, such as completed airliners, ready-to-ship cars and electronics. Retailers who buy and resell goods typically call Inventories “merchandise,” which includes finished goods bought from producers and can be resold immediately. Examples of merchandise include electronics, clothes and cars held by retailers.
  • Store and Spares: This category includes those products, which are accessories to the main products produced for the purpose of sale. Ex: Stores and spares items are bolts, nuts,clamps,screws,etc.

On the Basis of Purpose

  • Movements Inventories: These are also called transit or pipeline inventories. Their existence owes to the fact that transportation time is involved in transferring substantial amounts of resources.
  • Buffer Inventories: These are held to protect against the uncertainties of demand and supply. An organization generally knows the average demand for various items that it needs.However, the actual demand may not exactly match the average and could well exceed it. To meet this kind of a situation,inventories may be held in excess of the average for expected demand.
  • Anticipation Inventories: These are held for the reason that a future demand for the product is anticipated. Production of specialized times like crackers well before Diwali, umbrellas and raincoats before rains set.
  • Cycle Inventories: Cycle inventories are held for the reason that purchase are usually made in lots rather than for the exact amounts which may be needed at a point of time. Of course, if all purchases are made exactly as and when the item is required, there would be no cycle inventories.