Is Inventory a Current Asset?
The U.S. Division of Trading and Markets defines current assets as the resources that are reasonably expected to be sold for cash or other receivables within one calendar year. If the inventory for a business falls under this category, then that inventory could be considered a current asset. Morningstar lists inventories among other common line items in the category of current assets, which also include accounts receivable, short-term investments and cash or cash equivalents.
Because the value of inventory is directly related to its immediate ability to be sold, the inventory’s worth may be significantly less than it seems at face value. For instance, as the U.S. Small Business Administration indicates, the cost of marketing, which is necessary to sell the inventory, and the purchase price for buying the inventory must all be taken into account. Until those outlays of cash or credit are accounted for and recouped, then the full monetary value of the inventory is not available to be considered as an asset. Given the fluid nature of inventory and the importance of balancing product supply with demand, all while keeping costs in check, inventory management is crucial. Morningstar cautions that improperly managed inventory can cause lower profitability for a business, and in a worst case scenario, it could lead to a complete loss of assets for the business.
