Inventory
Definition
Inventory is goods held for sale (finished goods) or in production (raw materials, work in progress). It is a current asset carried generally at the lower of cost and net realizable value (or market, for LIFO/retail methods), and it moves to the income statement as COGS when the goods are sold.
Cost-flow assumptions matter: FIFO (first-in, first-out) and weighted average are allowed under both US GAAP and IFRS; LIFO (last-in, first-out) is allowed under US GAAP but prohibited under IFRS. In inflationary periods, LIFO produces higher COGS, lower pre-tax income, and lower taxes than FIFO.
An increase in inventory consumes cash and is subtracted in cash flow from operations. Inventory building faster than sales can signal weakening demand or upcoming write-downs.
Why interviewers ask
The buy-inventory walk-through is a classic: purchasing $10 of inventory with cash touches no income statement line — inventory up, cash down; only when sold does COGS hit. Interviewers also test LIFO versus FIFO effects on income and taxes in inflation, and the fact that IFRS bans LIFO.
Related terms
Interviews don't test definitions — they test recall under pressure.
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