Are you one of those investors who doesn't look at how a company accounts for its inventory? For many companies, inventory represents a large (if not the largest) portion of assets and, as such, makes up an important part of the balance sheet. It is, therefore, crucial for investors who are analyzing stocks to understand how inventory is valued.
What is Inventory?
Inventory is defined as assets that are intended for sale, are in process of being produced for sale or are to be used in producing goods.
The following equation expresses how a company's inventory is determined:
|Beginning Inventory + Net Purchases - Cost of Goods Sold (COGS) = Ending Inventory|
In other words, you take what the company has in the beginning, add what it has purchased, subtract what's been sold, and the result is what remains.
Source : Investopedia