Inventory is considered a current asset when the business intends to process its inventory into sales within the next accounting year or twelve months. A current asset in the balance sheet is one that is either cash or cash equivalent or that could be converted into cash within a year.
Is inventory a current asset? The answer to this question is yes in short, as inventories are convertible into cash within a year. Inventory is reported in the balance sheet as a current asset when a business intends to process and sell the inventory for converting it into cash within one year of its reporting.
Inventories are the goods used for manufacturing the finished goods or the goods purchased for selling purposes to gain profit in return. Inventory includes merchandise, work in progress, raw materials, and finished products.
What this article covers:
- Is Inventory a Current Asset or Noncurrent Asset?
- Why is Inventory a Current Asset?
- Is Inventory Always a Current Asset?
Is Inventory a Current Asset or Noncurrent Asset?
Inventory is considered one of the primary sources from which a business earns revenue, especially for the retail and wholesale businesses, and is listed as assets. Assets are further divided into current assets and noncurrent assets listed in the balance sheet and combine to result in a company’s total assets.
Current assets are listed at the top of the balance sheet and are available in cash or convertible into cash. A business uses its current assets to run its daily operations and to pay its current expenses. The current assets are arranged in the balance sheet according to their liquidity.
Examples of Current Assets include:
- Cash and cash equivalents
- Temporary investments
- Accounts receivables
- Prepaid expenses
- Marketable securities
Inventories are a significant current asset for a business that includes raw material and finished goods, which are readily convertible into cash within a year or less. Businesses/companies must maintain the level of inventory, neither high nor low.
Noncurrent assets are the long-term investments or assets for the company that has a useful life of more than a year; these are not converted into cash quickly. The noncurrent assets are listed below the current assets in the balance sheet. They are reported at the price that the company has paid to acquire, which is further adjusted for depreciation and amortization, considering the market price.
Examples of Noncurrent Assets:
- Property, land, and equipment
- Long-term investments and goodwill
Why is Inventory a Current Asset?
Inventory could be unsold merchandise or goods used to produce the finished goods, which is why it is a current asset. It could be liquidized quickly, and that’s why a company must have inventory on hand as a current asset.
While inventory is less liquid than other short-term investments such as cash and cash equivalent, it is considerably more liquid than land and equipment assets.
Is Inventory Always a Current Asset?
Inventory is said to be sold within the time of twelve months, and that’s why it is listed as a current asset. But businesses must maintain the level of their inventories, as excess inventories may become a liability for the business. Also, according to their shelf life, some items are perishable means they could become obsolete or can be spoilt.
Food items are perishable, for example, and can get spoilt or technological items that might become obsolete. To avoid these kinds of situations in your business, you must maintain your inventory by keeping a balance.
On the other hand, too little inventory could lead to bad experiences for your customers, which would ruin your business’s reputation.
Develop an inventory management system that will help you save money in the long run by saving time and reducing waste.
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