A company's ready-to-sell goods and products, as well as the raw materials used to make them, are referred to as inventory. There are three different inventory classifications: raw materials, work-in-progress, and finished goods.
What is comprised of the inventory?
- All the goods, merchandise, and supplies that a company keeps on hand in anticipation of selling them for a profit are referred to as inventory.
- Example: Only the newspaper will be regarded as inventory if a newspaper vendor utilizes a vehicle to distribute newspapers to clients. The car will be considered an asset.
- When the product is sold, the inventory is a cost. When a consumer pays you for that item, it no longer falls under the "asset" column on your revenue statement but rather under "cost."
- The balance sheet and the income statement are both impacted by an inventory write-down. Because write-downs are viewed as expenses, net income and tax obligations are decreased.
- Thus, a decline in net income causes a decline in retained earnings, which in turn causes a decline in shareholder equity on the balance sheet.
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