Difference between inventory and assets

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Assets and inventory are some of the most crucial elements in financial statements and for any business, are key resources. Nevertheless, unlike inventory, asset is a broader term since inventory is a component of assets. From the perspective of financial accounting, an asset can be defined as a tangible or intangible economic resources used in value production for the company.

Assets and Inventory Defined

Financial accounting has four main elements that form the basis of preparation of financial statements. These are assets, income, liabilities and expenses. Assets cover a wide range of items which appear on the Balance sheet or in the statement of financial position. Assets are then divided to two wide categories; fixed assets and current assets. The current assets normally include items which can be realistically transferred to cash within a time frame of one year. On the other hand, fixed assets are characteristically long term investments and are not expected to easily convert to cash in a time frame of one year. Goodwill, buildings and intellectual property are some of the examples of fixed assets.

On the other hand, inventory form part of current assets and include such items as materials and goods that a business holds for resale purposes. This is a crucial asset for the business since turnover of inventory is the one that determines the revenue amount and consequent earnings that are generated for the business as well as shareholders respectively. Inventory is normally kept by manufacturing companies for purposes of producing the final product to the end user after passing through different processing levels.

Types of Assets

Assets are classified into two types of categories; the tangible and intangible. The tangible assets are those that exist physically and include both current (inventories included) and non- current. On the other hand, non-tangibles are those assets which don’t exist physically. Among them include patents, copyrights, trademarks, goodwill and brand recognition.

Types of Inventories

Inventories fall into three types of categories; raw material stock, stock in work in progress and stock in finished goods. The basic component of a product is the raw material. For instance, cotton is a basic component of producing clothes while plastic is the raw material for toy manufacturing. Work in progress forms goods that are partly finished whose material is in the production process. The final product sold or distributed to consumers upon completion of the manufacturing process is the finished good. Toys and clothes in our example are the finished goods.

Current Assets and Inventory Compared

Even though inventory is a current asset, it is not involved in the cash ratio and quick ratio calculation. Cash ratio will only include assets of cash and cash equivalents. Inventory is deducted from current assets when computing the quick ratio.

Asset and Inventory Management

There is a difference in asset management and inventory management. A high amount of assets in a company’s books is considered favorable for the business since it increases the company’ liquidity and general worth. However, high levels of inventory has a negative impact on the reputation of the organization as it shows that you are either not able to sell it in the market or you are placing too much orders. This hence reflects poor management of inventory. Low inventory levels on the other hand is not desirable since it reveals that you don’t have adequate stock for meeting the customers’ demands and that which may ultimately lead to loss of sales or customers’ negative impact.

Value Changes

Fixed assets and inventory differ on basis of changes of value with time. The value of fixed assets amortizes or depreciates over time and during which period the assets offer useful services to the organization. On the other hand, the longer the time that inventory is held, the much it loses value.

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