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Is inventory a current asset?
Running a business

Is inventory a current asset?

Maintaining a balance sheet is one of the most difficult but essential aspects of running a business. Mistakes on your balance sheet can damage supplier relationships, disrupt business operations, and make it difficult to access funding from banks or venture capital firms.

To ensure accurate bookkeeping, we will discuss everything you need to know about inventory, accounting for your assets, and answering the question “Is inventory a current asset?” 

Before we dive in, let’s quickly review the difference between current and noncurrent assets.

Current vs. noncurrent assets

Both current and noncurrent assets will be included in a company’s overall balance sheet. However, there are differences in how these assets are handled and the role they play in the valuation of a company. 

Let’s review the key distinctions between current and noncurrent assets.

Current assets definition

A current asset is defined as any type of asset that can reasonably be expected to be converted into cash within one accounting period or fiscal year. Current assets tend to be ranked by liquidity (how easy it is to convert into cash) on a company’s balance sheet. 

Current assets are considered “current” because they are or could be used to pay bills, debts, and operational expenses.

Examples of current assets: Cash, short-term investments, accounts receivable.

Noncurrent assets definition

Noncurrent assets, also called “fixed assets,” are long-term investments and assets that can’t be converted quickly into cash. Noncurrent assets include real estate, copyrights or other kinds of intellectual property, and land.

Examples of noncurrent assets: Property, plant and equipment (PP&E) or long-term investments.

Is inventory a current or noncurrent asset?

Inventory is considered a current asset. In fact, inventory is one of the most important assets on a company’s balance sheet because the products and materials sold represent one of the primary sources of revenue and income. 

Of course, certain exceptions exist, such as companies in the financial services industry where the majority of revenue is created via investments.

Inventory also contains both finished goods ready for store shelves and unfinished goods like raw materials and work-in-progress goods.

Why inventory is a current asset

Assuming your inventory is produced in alignment with demand, you should reasonably expect to sell off your inventory production within a fiscal year. This is especially true if your enterprise sells fast-moving consumer goods (FMCG), the type of goods that define most retail businesses.

3 most common methods of valuing inventory

Inventory valuation is one of the most important financial details a business owner or accounting team must deal with. 

Accurate inventory management is critical to evaluate logistics, employee productivity, and warehouse efficiency and to successfully handle customer and supplier orders. Let’s discuss the three most popular methods of inventory valuation.

FIFO: First in, first out method

The first accounting method is FIFO, which is highly intuitive. Using the FIFO method, the goods you purchase or make first are sold first. 

The advantage of FIFO is that it reduces spoilage, obsolescence, and other forms of waste by minimising the time units spent in your inventory before being sold. The disadvantage of FIFO is that it tends to provide an overly optimistic view of financial performance due to the fact that prices, as a general rule, tend to rise over time.

Example industries: Restaurants, grocery stores, and other sellers of perishable goods.

LIFO: Last in, first out method

The LIFO method is the inverse of FIFO. Companies that use the LIFO method always sell whatever goods or materials they received most recently, as opposed to whatever goods they received first.

Companies using LIFO will likely calculate lower earnings and financial statements than companies using FIFO. The advantage of this practice is that income taxes will be lower. But LIFO carries disadvantages when trying to acquire lending from banks or outside investments.

Important note:

LIFO is not an acceptable method under the IFRS (International Financial Reporting Standards) regulations. However, it is an acceptable method for Australian companies who are governed by GAAP (Generally Accepted Accounting Practices) regulations.

Example industries: Plastic and rubber manufacturers, energy, and other industries where the market price of goods rises significantly over time.

WAC: Weighted average cost method

The WAC method is a simplified version of accounting that is considered a good starting point for retailers. It is also commonly used by businesses who find it difficult to calculate individual unit costs.

WAC is calculated by dividing the cost of goods sold (COGS) by the number of inventory units available. The advantage of the WAC method is that it simplifies your accounting procedures. The disadvantage is that it can provide an inaccurate valuation of the items in your inventory, which can result in selling items at a loss.

Example industries: Agriculture, manufacturing, and any other industry where calculating individual unit costs is especially burdensome.

How to calculate current assets

Current assets are calculated by combining all of the assets that can be converted into cash to pay off expenses and debts in a reasonable period of time. To calculate your current assets, add the total of:

  • Cash
  • Cash equivalents, such as treasury bills or certificates of deposit (CDs)
  • Marketable securities, including stocks, bonds, exchange-traded funds (ETFs), and mutual funds
  • Accounts receivable
  • Inventory
  • Prepaid revenue share and prepaid expenses
  • Non-trade receivables
  • Other current assets (any short-term asset that cannot be included into one of the above categories)

Accounting ratios you should know

The following accounting ratios are of crucial importance to mid-market businesses because they are a representation of how well-positioned your company is to be able to pay off all debts – and may influence how “investable” of the company you are perceived to be.

Quick ratio

Your quick ratio provides a snapshot of your ability to pay off short-term debt by comparing your most liquid assets to all current liabilities due within a single calendar year. Quick ratio is calculated using the following formula:

(Cash + cash equivalents + short-term investments + accounts receivable) / current liabilities = quick ratio)

Since quick ratio does not take into account all current assets, it is considered a more conservative figure than a company’s current ratio. Companies with a quick ratio below 1 are unable, or will find it difficult, to cover their debts and are considered risky investments.

Current ratio

The current ratio of a company is another method used to measure the ability of said company to pay off its short-term debt. However, this calculation takes into account all current assets, including inventory and prepaid expenses.

Current assets / Current liabilities = Current ratio

A current ratio of 2 or greater is considered healthy. Keep in mind that if your current ratio is significantly higher than that of your competitors, this may indicate poor use of resources (for example, excess inventory risk or investable cash sitting idle).

Cash ratio

The cash ratio is an even more conservative estimate of a company’s ability to pay off debt than a company’s quick ratio. That is because the cash ratio only takes into account cash and cash equivalents and compares this sum to current liabilities. The cash ratio formula is as follows:

Cash + equivalents / current liabilities = cash ratio

A cash ratio of 1 is considered healthy. But similar to the other ratios above, if your cash ratio is too high, this may point to inadequate use of resources.

Inventory turnover ratio

The inventory turnover ratio measures efficiency by gauging the average amount of times a company is able to sell its existing inventory in a given time period, typically one year. Inventory turnover ratio can be calculated using the following formula:

COGS / average inventory = inventory turnover ratio

This figure is highly subjective based on industry, so there is no one-size-fits-all figure that represents a good or bad inventory turnover ratio. Instead, compare your inventory turnover ratio to that of your peers. A relatively lower figure represents excess inventory or inefficient sales practices.


Proper management of your assets and accounting methodologies is of critical importance to any business owner who wants to optimise profitability and generate growth. Learn how QuickBooks can help you manage inventory and keep up with your growing business with QuickBooks Online.

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