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We re going to learn a concept. Which is known as inventories and you i mean what type of inventories are there raw materials work in progress and finish goods right this other three types. The inventory is bifurcated as you can see over here in the extract. There is a detail in the inventory section.
Given for 31st december. The data of raw materials and supplies. Which is the heading it includes your work in progress. Which is 266 the finished goods and the total inventory.
So sorry the raw materials and inventories work in progress in finished goods. 266. 42. 42.
And 863 is the amount and the total inventory is then being summed up so let s understand this. See inventory means you know those are the current assets. You know..
Which has been or will be converted into final products of a company for sale in the near future so in other words inventory presents the finished goods goods that have been in or goods. In different stages of production that a company keeps it at at its premises or like the third party location with the ownership interest region. You know until the goods are been sold. So the three most important types of inventory as we just saw is the raw material then we have finished goods sorry.
We have the work in progress wip. The third is what we have is called as the finished goods. Okay now have a look at the colgates inventory break about 2016 and 15. You know there are three types of inventory that we just saw listed the raw material supplies the work in progress and the finish goods and we also know that you know the majority of the colgate s inventory is the finished goods okay and is it good or bad for colgate.
I mean that s the question over here. It is it good or bad so in this tutorial. We will understand the nuts and the bolts of this type of inventory. And its implication of the financial analysis.
Now first we ll try and deal with the introduction part of this introduction on the inventory. You know since the inventory is an asset. It is listed in the asset part of the balance sheet and because it is most likely to get converted into revenue within a year. It is on the balance sheet under the current asset.
It is under the current asset category. Now when the finished goods gets sold and get converted into revenue. The carrying cost of the inventory is also reported the carrying cost of the inventory is also reported in the income statement..
Ok of the company under the item that is called as your cost of goods sold the cogs for any company. Especially manufacturing or a trading company the pace of the conversion of the inventory into revenue is one of the most important factors. Because you know it directly decides you know how much the revenue or the company is earning or will earn like for a trading company the inventories call as the merchandise. Because there is no conversion.
That is taking place and our trader merely buys and resells finish goods bought from the manufacturer. So that s the difference now as we see from the above the amazon s lists the seller inventory on the this is the extract that is taken from the amazons and nostro accounts. You know what we see that you know we provide fulfillment of the amazon service in connection with the certain of our seller programs. The third party seller maintains ownership of the inventory regardless of whether the fulfillment is provided by us or the third party seller.
And therefore the products are not included in our inventories. So what we see above is here that the amazon lists the sellers inventory on the marketplace. However this this third party seller maintains the ownership of the inventory. And therefore such products are not included in the amazons inventory now the speed at which the inventory gets converted into the finished goods and the finished goods gets converted into the revenue is called as the inventory turnover okay now this inventory turnover is very important for a company since it is the biggest contributor of the company s revenue generation and the subsequent generation of the value for the investor.
And that is why having the understanding of the inventory. Its management and its analysis is very important for an analyst as well as an investor of any company. So now let s jump on to the types of inventory as mentioned you know the three most important types of inventory are the raw material the finished goods the wip and the finished goods okay and this are the few of the categories into which the item is representative representing a company s inventory can be classified. So let us first have a look at the basic understanding of the different types of inventory and on the post facto cases.
We ll look at the ways in which they are managed and analyzed the first that we ll try and interpret is the raw material over here now raw material are the basic materials that a manufacturing company they buy and the sell they buy from the supplier. And that i used are for by the former to convert them into the final products by applying a set of manufacturing process. I ll give you an example for the same let s say there is an aluminum scrap okay aluminum scrap and is basically the raw material for the company that produces aluminum ignores so floor is the raw material for a company that produces bread or pizza..
Similarly. You know metal parts and the ignores are raw material bought by the company that manufacturers cars and crude oil. And is the raw material for any oil refinery. Now.
It is very common and easy to observe that the final product of the one company are bought as the raw material for some company like for instance. You know many oil drilling companies they produce crude oil as the final product on the other hand. The same crude oil is bought by the oil refining. The companies as a raw material in order to produce their final product.
Like like you can see their gasoline kerosene paraffin and so on and so forth right. Now the second that we need to understand is the wip that is the work in progress. The work in progress inventory can also be classified as the semi finished goods and they are the raw material that have been taken out from the raw material store and now undergoing the process of the conversion into the final product. So this are you can say the partly processed raw material and by lying on the production flow.
And they also have not reached the stage. Where they have been converted into the final product. The next that we have in our list is the finished goods now finished goods are basically are indeed the final product obtained after the application of the manufacturing process on the raw material and the semi finish goods discussed in the article. So this are the sellable and their sale contributes fully with the revenue from the core operations of the company.
Now regardless the level of the finished goods inventory. There are basically two types of industries that we need to look at the first we would take the industries in which the finished goods are the mass diaby mass produced right like like fmcg industry and the oil industry for a company in such an industry. The correct approach is to maintain the finished goods inventory in a similar manner as the raw material inventory is maintained that is you know the optimized level as per the demand of in the market now there are two type of analysis..
One can do the first one you know is the quantitative analysis that is by the inventory turnover ratio and under this the technique you know the ratio is used for the financial statement to calculate certain ratios to perform the ratio analysis the common ratios is used to perform the ratio analysis regarding the inventory management of the company are the inventory days and the inventory turnover of the inventory to sales ratio the second way of analyzing is by the qualitative analysis. Now if you see by this under the qualitative technique as an analyst reads. The notes to the financial statements. He tries to understands the the inventory valuation methods use like like fifo.
They use also another form another method that s called lifo wam that is weighted average method and so on and so forth so to make a final conclusion on this inventories are basically the assets that will have been converted into the final products company and there are three major types. Which we know the management of the inventory calls for the optimum level of the inventory that can be maintained by creating an inventory. Purchasing plan as for the strategy adopted by the company inventory analysis can be you know as we saw qualitative and quantitative. The former uses the ratio analysis.
Which includes historical as well as the pure company and the later that is the qualitative analysis uses the valuation methods used for company for reporting its inventory. So by carrying both this type of inventory. Analysis and an analyst can get a good idea of how well or poorly a company has been in its various types of inventories. So that s it for this particular topic.
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