Inventories or Stocks – Part 1, Introduction

 

Inventories or stocks are one type of assets to many business entities. Inventories or stocks could be in the form of trading goods/merchandise for those business entities principally engaged in purchasing the goods from suppliers and resell those goods to the customers. For a typical manufacturer, inventories or stocks could be in the form of raw materials used in the manufacturing process. Other than raw materials, inventories or stocks could also be in the form of unfinished products called work-in-progress or they could also be in the form of finished goods/products that are ready for sale to the customers.

For many business entities that engaged mainly in providing services, all the tangible inventories mentioned earlier simply are not applicable because these businesses provide services to the customers as major source of revenue or income. However, for some business entities engaged in development of houses, land held for subsequent development into houses are another type of inventory or stock and obviously those unsold houses on hand are the finished products available for sale and therefore are inventories or stocks to the business entities concerned. Any other type of inventories or stocks can you think of? What about livestock and those agricultural produce? As long as these items are meant to be sold to the customers on a “regular” basis with a view to make profit, they are all inventories or stocks to the business entities concerned. What about those items such as office stationery (pens, pencils, papers & etc)? To a stationery distributor or retailer, these are inventories or stocks. However, for many other small businesses whereby the stationery purchased are of the nature of frequently used office supplies, the amount involved normally is insignificant and is therefore normally treated as expenses.

Inventories or stocks are assets to business entities. In other words, they must be valuable to these business entities and in this context, some form of sacrifice (e.g. money spent or in rare cases exchange with other type of assets) must have been made to acquire them. For a typical trading goods merchandiser, inventories or stocks would come into his/her possession when purchases of these goods are made from the suppliers.

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