Raw Material Purchases: As part of the normal course of business, a company must replenish its inventories as needed by purchasing new raw materials.Ĭhange in Inventory on Cash Flow Statement (CFS).Cost of Goods Sold (COGS): On the balance sheet, inventories is reduced by COGS, whose value is dependent on the type of accounting method used (i.e.The carrying value of a company’s inventories balance is affected by two main factors: ![]() The formula to calculate the ending inventory balance is as follows.Įnding Inventory = Beginning Inventory Balance – COGS + Raw Material Purchases ![]() the protective gloves worn by employees while manufacturing the product). Maintenance, Repair, and Operating Supplies (MRO): The inventories essential to the production process but not directly built into the final product itself (e.g.Finished Goods (Available-for-Sale): The finished products that have completed the entire production process and are now ready to be sold to customers.Work-In-Progress (WIP): The unfinished products in the production process (and thus not yet ready to be sold).Raw Materials: The components and parts of material necessary in the process of creating the finished product.Generally speaking, the four different types of inventories are raw materials, work-in-progress, finished goods (available-for-sale), and maintenance, repair, and operating supplies (MRO). sold to customers) within one year, or twelve months. The inventory balance of a company is recorded on the current assets section of the balance sheet, since unlike fixed assets (PP&E) - which have useful lives of greater than twelve months - a company’s inventories are expected to be cycled out (i.e. In accounting, the term “Inventory” describes a wide array of materials used in the production of goods, as well as the finished goods waiting to be sold. How to Calculate Inventory (Step-by-Step) Inventory refers to the raw materials used by a company to produce goods, unfinished work-in-process (WIP) goods, and finished goods available for sale.
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