Reporting and Analyzing Inventories

Read this section, which focuses on reporting inventories and inventory turnover ratio.

Reporting Inventories

Inventory is an asset and its ending balance should be reported as a current asset on the balance sheet.


LEARNING OBJECTIVES

Describe how a company reports inventory on the financial statements


KEY TAKEAWAYS

Key Points
  • In a business accounting context, the word inventory is used to describe the goods and materials that a business holds for the ultimate purpose of resale.
  • Companies must choose a method to track inventory.
  • The change in inventory is a component of in the calculation of cost of goods sold, which is reported on the income statement.
Key Terms
  • inventory: Inventory includes goods ready for sale, as well as raw material and partially completed products that will be for sale when they are completed.


Inventory

In a business accounting context, the word inventory is used to describe the goods and materials that a business holds for the ultimate purpose of resale.


Inventory Accounting Systems

Companies must choose a method to track inventory. There are ways to account for inventory, periodic and perpetual. The perpetual inventory system requires accounting records to show the amount of inventory on hand at all times. It maintains a separate account in the subsidiary ledger for each good in stock, and the account is updated each time a quantity is added or taken out.

In the periodic inventory system, sales are recorded as they occur but the inventory is not updated. A physical inventory must be taken at the end of the year to determine the cost of goods.

Regardless of what inventory accounting system is used, it is good practice to perform a physical inventory at least once a year.


Reporting Inventory

Inventory itself is not an income statement account. Inventory is an asset and its ending balance should be reported as a current asset on the balance sheet. However, the change in inventory is a component of in the calculation of cost of goods sold, which is reported on the income statement.

 Inventory: Inventory appears as an asset on the balance sheet.

Depending on the format of the income statement it may show the calculation of Cost of Goods Sold as Beginning Inventory + Net Purchases = Goods Available – Ending Inventory. In that situation the beginning and ending inventory does appear on the income statement.


Source: Boundless, https://courses.lumenlearning.com/boundless-accounting/chapter/reporting-and-analyzing-inventories/
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