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What is Inventory?

Inventory (Definition)

Inventory is also known as stock, and it refers to the raw materials your business uses in production or has to sell. Your inventory is one of the most important sources of revenue generation and, as a result, one of the most important sources of profitability for shareholders. A company's inventory can be divided into three main categories: raw materials, finished commodities, and work in progress. Raw materials are the materials used by a company to create products, such as material to create shirts. Finished products are those that are complete and ready to sell. Work in progress refers to products along the production line, such as raw materials, packing materials and even labour.

Inventory is valued in three ways. The First-In, First-Out technique means the value of products sold is based on the cost of the materials that were purchased first. Last in, first out is when the cost of goods sold is valued using the cost of the most recent purchased materials. While the weighted average method is when inventory value is based on the average cost of all materials purchased during the reporting period.

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