In inventory

Definition

Inventory refers to the goods and materials a business holds for the purpose of resale. It is a crucial component of a company’s assets that directly affects its operating efficiency ratios.

5 Must Know Facts For Your Next Test

1. Inventory turnover ratio measures how often inventory is sold and replaced over a period.
2. High inventory levels can tie up capital and increase holding costs, reducing financial efficiency.
3. Just-in-time (JIT) inventory systems aim to minimize inventory levels while meeting customer demand.
4. Carrying too little inventory can lead to stockouts and lost sales opportunities.
5. Inventory management techniques directly impact the liquidity and profitability of a business.

Review Questions

• What does the inventory turnover ratio indicate about a company's operations?
• How can high levels of inventory affect a company's financial health?
• What are the potential risks of maintaining low levels of inventory?

Related terms

Inventory Turnover Ratio: A measure of how many times inventory is sold or used in a time period such as a year.

Just-in-Time (JIT): An inventory management approach where materials are only ordered and received as they are needed in the production process.

Liquidity: The ability of an asset to be converted into cash quickly without affecting its market price.