Have you ever sold something you own on a digital marketplace for cash? Have you ever used this cash to fund a payment plan or outstanding debts?
If you answered “yes,” I’m not surprised. People do it, and so do businesses.
Instead of taking out a loan to fund repayments, selling assets like clothing or electronics can be a great alternative. Any item, or inventory, that can be sold for quick cash is referred to as a current asset.
Is inventory a current asset?
The short answer is yes, inventory is a current asset because it can be converted into cash within one year. Other examples of current assets include cash, cash equivalents, marketable securities, accounts receivable, pre-paid liabilities, and other liquid assets.
Why is inventory a current asset?
Inventory is a current asset because it is something a company owns yet hasn’t sold. An example of this would be unsold merchandise in retail, also known as backstock.
When cash is needed fast, it’s important to have a current asset like inventory on hand so it can be liquidized, but what exactly qualifies as inventory?
Examples of inventory
Inventory is actually considered more than just backstock. Any valuable item that goes into the production of a good is still inventory. This includes raw materials, work in progress (unfinished products), and finished goods. For example, aluminum and steel can be considered inventory.
Managing large quantities of inventory and understanding its value can be very difficult for some businesses. This is why inventory control software is being used more regularly to track assets and centralize inventory databases.
Not all inventory is created equal
The liquidity of a businesses’ inventory depends on its demand, depreciation, seasonality, industry sector, and other factors. So, while you think you can offload that backstock of 10 excavators at $100,000 per-item, it won’t matter unless there’s a need for them.
A more liquid example of inventory is rain ponchos. Really, rain ponchos? Well, there’s a higher chance of having a large backstock of rain ponchos all throughout the year. During wet seasons when the demand increases, your chances of offloading thousands of items are higher as well. Rain ponchos, unlike excavators, also don’t depreciate in value over time.
Having relevant inventory that can be sold quickly for cash is important.
Learn more about managing finances
Any business owner knows just how chaotic it can be to manage finances. Who is owed what? How many total assets do we have? What are our liabilities?
Thankfully, answers to all these questions can be found in the balance sheet. Learn everything about the balance sheet and why it’s important for business owners and their accountants to look over.