As one of the business’ current assets, inventory is the sum total of all the materials that the business uses to transform into its products offered for sale.
What It Means
Various types of inventory may exist depending upon the type of business. The most common inventory types are:
- Raw materials
- Work in progress
- Finished goods
Small businesses typically account for their inventory on either a FIFO or LIFO basis. The LIFO inventory accounting means that the last inventory item bought by the business is the first one to be sold. Using the LIFO inventory method generally results in higher cost of goods and lower business taxable income.
The FIFO method assumes that the first inventory item purchased is the first to be sold. When valuing a small business for sale, you should use the FIFO method as it gives you a more accurate picture of the business profitability and the current inventory value.
When a small business changes hands, the amount, condition, and value of inventory must be carefully assessed, and the business purchase price adjustments made, if necessary.