Introduction to Inventory Accounting
Understanding Inventory
Inventory consists of goods held for sale, goods in the process of production, and materials used to manufacture products. Inventory is one of the largest current assets for many businesses and directly affects cost of goods sold (COGS), gross profit, net income, and the balance sheet. Proper inventory accounting is essential for accurate financial reporting under U.S. GAAP.
- Inventory is classified as a current asset.
- Inventory affects both the balance sheet and income statement.
- Inventory accounting determines cost of goods sold.
- Incorrect inventory reporting affects profitability and taxes.
Note
Inventory is one of the most frequently tested topics on the CPA FAR exam because it combines valuation, cost flow assumptions, estimation techniques, and financial statement presentation.
Summary
Inventory accounting determines the cost assigned to goods sold and goods remaining, making it fundamental to financial reporting.