Inventory

Category

Balance Sheet

Units

Currency

US-GAAP elements

InventoryNetInventoryGross

Reference

Regulation S-X Rule 5-02.6 (Inventories); ASC 330

Source

Reported in SEC EDGAR filings (US-GAAP XBRL taxonomy)

Inventory, reported on the balance sheet as inventories, consists of goods a company holds for sale in the ordinary course of business, products still being made for sale, and materials and supplies that will be used up in production. They are reported as a current asset at cost, reduced where necessary to what the company expects to recover when the goods are sold.

For a manufacturer, inventories combine raw materials, work in process, and finished goods. For a retailer or distributor, they are mainly merchandise bought for resale. Service businesses and software companies often carry little or none.

Inventory is accounted for under ASC 330. Cost includes the purchase price and the costs of bringing goods to their current condition and location, such as freight, direct labor, and allocated factory overhead. Companies choose a cost-flow method, such as FIFO, average cost, or LIFO. FIFO and average-cost inventories are carried at the lower of cost and net realizable value, while LIFO and retail-method inventories use a lower of cost or market test. In XBRL filings the balance-sheet figure is usually tagged InventoryNet, after valuation and LIFO reserves; InventoryGross is the amount before them.

Regulation S-X Rule 5-02.6 asks companies to disclose major classes of inventory where practicable, to state the basis used to value inventory and the method used to remove costs from it, and to describe the kinds of cost included. When LIFO is used and the gap is material, the company must state how much higher inventory would be at replacement or current cost.

The choice of method matters for comparisons. In a period of rising prices, LIFO charges the newest, most expensive costs to cost of sales, so reported inventory can sit well below current value and gross margins look lower than under FIFO. Analysts measure how efficiently a company uses its inventory with inventory turnover and days inventory outstanding, and watch for inventory growing faster than sales, which can foreshadow markdowns or write-downs. An increase in inventory also reduces operating cash flow in the period it happens.