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Is inventory an asset or a liability? How do we determine if it is an asset or a liability?

Is inventory an asset or a liability? How do we determine if it is an asset or a liability? Might the determination be different for different people in the same organization? Please discuss, providing specific examples.

This would depend on the industry and company financial situation. In most cases to save money people will be careful in ordering material and considering inventory as their burden on their shoulder. This is one of the complicated ares of inventory for any investors, producers, manufacturers, or leaders of any kind. We can swing this both ways. Inventory is definitely an asset because it is the physical goods that you sell, purchase and make your product. Becuase an inventory is something that has value for the company, it is regarded as an asset and not a liability. Assets are things that you have whilst liabilities are things that you owe. However, an inventory can be viewed as a liability especially when these goods are bought on credit and the fact that cost are accrued when you hold inventory

Inventory is both an asset and a liability, and here is my reasoning for this. If you are maintaining the inventroy levels and making the correct turns for the product and consistantly growing your gross margin then you are doing the right thing. The flip side to this is the amount of inventory and what you are holding on to. If the inventory is too much and or not selling it then you are not making the profit off the product. In order to turn a profit it is up to the Operation Mnanager to ensure the levels are where they need to be to make the best bang for the buck. Proper inventory management should limit the amount of products that do not regularly cycle in and out. As we learned in previous classes, using an ABC inventory management method will allow companies to focus on high margin/volume products. Important inventory items, for whatever reason, are considered an A inventory item where non important inventory items are considered C items. Less capital should be invested in C inventory items therefore limiting their potential liability.

Assets include everything company owns that has value. They are listed on a balance sheet each period, along with liabilities and owners’ equity. Current assets typically include cash, marketable securities, accounts receivable and inventory. For a manufacturer, inventory is the value of the raw materials used to make products. Inventory is recorded on company’s balance sheet, and it is considered part of company’s current assets. This means that it has value and is typically sold within 12 months. Inventory can become liability if this is not sold or if it doesn’t move out of inventory. It can also become liability if the inventory is spoiled in the warehouse.

References:

http://yourbusiness.azcentral.com/inventory-asset-liability-1689.html

Inventory can be both an asset and a liability. When inventory is being sold it is considered an asset and when it becomes overstock it becomes a liability with the additional charges that are associated with it such as holding or carrying cost. It can be different for people in the same organization for example, one member in the company may be holding on to a product in case of shortages when the other wants to get rid of it because of the charges that are associated with storage cost.

Inventories need to be managed so that you do not end up with way too much, however we always seem to create more of a systemic problems for the business when we adjust inventories to pad the numbers.   This is a quarterly issue where I work.   A call for a last minute inventory reductions before the finial numbers are posted tells me there is a greater underlying issue.

Inventory management is very important in the retail businesses. Inventory helps in assessing exact status of the production and helps in timely delivery of the products. A manufacturing inventory contains all the data about raw materials, finished goods and production goods. A poorly managed inventory can harm the future of the business resulting in great loss. Good inventory management helps the business to reduce its costs and increase sales. An effective way of achieving this is by having an inventory management system in place, which will track and maintain inventory so that customer demand can be met. They can also be linked to the accounting or management departments, so that all operations can become more effective, reducing costs and maximising profit. Benefits of inventory management are:

  • Reduces cost of inventory obsolescence
  • Organization becomes truly responsive to customers’ real needs
  • Makes scheduling and shop loading more efficient
  • Narrows the gap between sales and stock replacement
  • Fine-tune record-keeping accuracy for better inventory management
  • Reduces Cost
  • Increases sales for the organization

References:

http://www.citeman.com/18575-importance-of-inventory-in-a-manufacturing-unit.html

An important role that inventory plays in the supply chain is to increase the amount of demand that can be satisfied by having product ready and available when the customer wants it. Another significant role inventory plays is to reduce cost by exploiting any economics of scale that may exist during both production and distribution.

 

Inventory is spread throughout the supply chain from raw materials to work in process to finished goods those suppliers, manufacturers, distributors, and retailers hold. Inventory is a major source of cost in a supply chain and it has a huge impact on responsiveness. If we think of the responsiveness spectrum, the location and quantity of inventory can move the supply chain from one end of the spectrum to the other.

Yes, customer demands calls for our inventory level to be in place. Would you make any changes if you have someone as your customer and also happens to be your supplier? Is it possible– your thought!!!

For the firm that I work for, inventory is both an asset and a liability. It is an asset as far as the tools and structures needed to build our machines. It is a liability in the form of too many parts on hand. The current issue with inventory today is that our forecast has changed and demand decreased; causing too much material stored at our plant. This is a liability because this material isn’t moving as quickly as planned.

Inventory is a quantity or store of goods that is held for some purpose or use. Inventory may be kept “in-house,” meaning on the premises or nearby for immediate use; or it may be held in a distant warehouse or distribution center for future use. A manufacturer must have certain purchased items, raw materials, components, or other items needed, in order to manufacture its product. Running out of only one item can prevent a company from completing the production of its finished goods.

While officially classified as an asset, inventory can often feel more like a liability. For example, even though assets such as inventory are defined as “items of economic value,” few business owners are excited about having excess inventory. To grasp this asset-liability , you must understand the difference between inventory, the products or raw materials and the cost of holding it. An asset puts money into your pocket, an asset should generate income on a regular basis. The traditional definition of an asset is anything that you own is worth something-that could be “turned into money” if you needed it to be. Liabilities are the opposite of assets. Liabilities take money out of your pocket. In fact, a lot of things mentioned above- the TV or computer in your room that that might traditionally be considered “assets”-are actually liabilities right now, because it took money out of your pocket just to get them.

Inventory is an asset, because inventory is a stock or store of goods. An asset is a resource controlled by the entity as a result of past events or transactions and from which future economic benefits are expected to flow to the entity. Inventories are a vital part of business. Not only are they necessary for operations, but they also contribute to customer satisfaction.

 

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