Inventory
The goods a company holds for sale or the raw materials and work-in-progress used to produce those goods.
What is Inventory?
Inventory is the raw materials, work-in-progress (WIP), and finished goods a company holds in anticipation of sale. It appears as a current asset on the balance sheet, valued using cost accounting methods: first-in, first-out (FIFO), last-in, first-out (LIFO, allowed only under US GAAP), or weighted average cost. The inventory turnover ratio measures how many times inventory is sold and replenished over a period: higher turnover indicates efficient operations. Days inventory outstanding (DIO) converts this to the average number of days inventory is held. Excessive inventory ties up capital and risks obsolescence; too little risks stockouts and lost sales.
Example
A retailer starts Q3 with $100M in inventory, purchases $400M in goods during the quarter, and ends with $120M in inventory. Cost of goods sold = $100M + $400M - $120M = $380M. Inventory turnover = $380M / $110M average inventory = 3.5x per quarter, or 14x annually. Days inventory outstanding = 365 / 14 = 26 days — meaning inventory sells through in about 26 days on average.
Source: FASB ASC 330 — Inventory