Final answer:
Inventory is the goods and materials held by a business for resale. Managing inventory involves balancing costs and demand to impact a firm's financial performance, including cash flow and profits. Types of inventories include raw materials, work-in-process, and finished goods.
Step-by-step explanation:
Inventory Definition and Examples
Inventory refers to the goods and materials that a business holds for the ultimate goal of resale. Examples of inventory include products in a retail store, components in a manufacturing plant, or raw materials used in production.
Importance of Inventory
Effective inventory management is crucial for ensuring that a company has enough stock on hand to meet customer demand without incurring excess costs.
Types of Inventories
Raw materials - Items that are to be used in the production of a product.
Work-in-process (WIP) - Goods that are still in the process of being manufactured.
Finished goods - Completed products ready for sale.
Key Decisions and Costs
Companies must decide on the appropriate levels of inventory by considering factors such as storage costs, perishability, and demand forecasts. Key costs involve storage, insurance, and opportunity cost of capital tied up in inventory.
Impact on Financial Performance
Inventory affects a firm's financial performance by influencing cash flow, working capital requirements, and profits. Holding either too much or too little inventory can have negative financial consequences for a business.