Final answer:
Inventory is classified as a current asset on the balance sheet, reflecting its role in a company's day-to-day operations and its expected conversion into cash or sales within a year or the business's operating cycle.
Step-by-step explanation:
Inventory is classified on the balance sheet as a current asset. A current asset is an item of value that a firm owns and expects to convert into cash, sell, or consume either in one year or in the operating cycle of the business, whichever is longer. Inventory meets these criteria as it consists of goods available for sale to customers in the ordinary course of business.
Unlike long-term assets, which are held for more than one year, current assets are crucial for the day-to-day operations of a business. They are essential for maintaining the liquidity and overall health of a company. Because inventory can be sold to generate revenue and cash flow, it is not classified as a liability; rather, it is an asset that the business plans to sell for a profit.