Types of Inventory | Top 3 Types of Inventory - YouTube

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by clicking the bell icon. Friends we're going to learn a concept which is known

as inventories and you I mean what type of inventories are there? Raw materials,

work in progress, and finish goods, right this other three types the inventory is

bifurcated as you can see over here in the extract there is a detail in the

inventory section given for 31st December the data of raw materials and

supplies which is the heading it includes your work in progress which is

266, the finished goods and the total inventory so sorry the raw materials and

inventories work in progress in finished goods 266 42 42 and 863 is the amount

and the total inventory is then being summed up. So let's understand this see

inventory means you know those are the current assets you know which has

been or will be converted into final products of a company for sale in the

near future so in other words inventory presents the finished goods. Goods that

have been in or goods in different stages of production that a company

keeps it at at its premises or like the third party location with the ownership

interest region you know until the goods are been sold. So the three most

important types of inventory as we just saw is the raw material then we have

finished goods sorry we have the work-in-progress

WIP the third is what we have is called as the finished goods okay. Now have a

look at the Colgates inventory break about 2016 and 15 you know there are

three types of inventory that we just saw listed the raw material supplies the

work-in-progress and the finish goods and we also know that you know the

majority of the Colgate's inventory is the finished goods okay and is it good

or bad for Colgate I mean that's the question over here it is it good or bad

so in this tutorial we will understand the nuts and the bolts of this type of

inventory and its implication of the financial analysis. Now first we'll try

and deal with the introduction part of this introduction on the

inventory you know since the inventory is an asset it is listed in the asset

part of the balance sheet and because it is most likely to get converted into

revenue within a year it is on the balance sheet under the current asset it

is under the current asset category now when the finished goods gets sold and

get converted into revenue the carrying cost of the inventory is also reported

the carrying cost of the inventory is also reported in the income statement ok

of the company under the item that is called as your cost of goods sold the

cogs. For any company especially manufacturing or a trading company the

pace of the conversion of the inventory into revenue is one of the most

important factors because you know it directly decides you know how much the

revenue or the company is earning or will earn like for a trading company the

inventories call as the merchandise because there is no conversion that is

taking place and our trader merely buys and resells finish goods bought from the

manufacturer so that's the difference. Now as we see from the above the

amazon's lists the seller inventory on the this

is the extract that is taken from the Amazons and nostro accounts you know

what we see that you know we provide fulfillment of the amazon service in

connection with the certain of our seller programs the third party seller

maintains ownership of the inventory regardless of whether the fulfillment is

provided by us or the third party seller and therefore the products are not

included in our inventories so what we see above is here that the Amazon lists

the sellers inventory on the marketplace however this this third party seller

maintains the ownership of the inventory and therefore such products are not

included in the Amazons inventory. Now the speed at which the inventory gets

converted into the finished goods and the finished goods gets converted into

the revenue is called as the inventory turnover.

okay now this inventory turnover is very important for a company since it is the

biggest contributor of the company's revenue generation and the subsequent

generation of the value for the investor and that is why having the understanding

of the inventory its management and its analysis is very important for an

analyst as well as an investor of any company. So now let's jump on to the

types of inventory as mentioned you know the three most important types of

inventory are the raw material, the finished goods, the WIP

and the finished goods okay and this are the few of the categories into which the

item is representative representing a company's inventory can be classified so

let us first have a look at the basic understanding of the different types of

inventory and on the post facto cases we'll look at the ways in which they are

managed and analyzed the first that we'll try and interpret is the raw

material over here now raw material are the basic materials that a manufacturing

company they buy and the sell they buy from the supplier and that I used are

for by the former to convert them into the final products by applying a set of

manufacturing process I'll give you an example for the same let's say there is

an aluminum scrap okay aluminum scrap and is basically the raw material

for the company that produces aluminum ignores so floor is the raw material for

a company that produces bread or pizza similarly you know metal parts and the

ignores are raw material bought by the company that manufacturers

cars and crude oil and is the raw material for any oil refinery now it is

very common and easy to observe that the final product of the one company are

bought as the raw material for some company like for instance you know many

oil drilling companies they produce crude oil as the final product on the

other hand the same crude oil is bought by the oil refining the companies as a

raw material in order to produce their final product

like like you can see their gasoline, kerosene

paraffin and so on and so forth right. Now the second that we need to

understand is the WIP that is the work in progress

the work in progress inventory can also be classified as the semi-finished

goods and they are the raw material that have been taken out from the raw material

store and now undergoing the process of the conversion into the final product so

this are you can say the partly processed raw material and by lying on

the production flow and they also have not reached the stage where they have

been converted into the final product. The next that we have in our list is the

finished goods now finished goods are basically are indeed the final product

obtained after the application of the manufacturing process on the raw

material and the semi finish goods discussed in the article so this

are the sellable and their sale contributes fully with the revenue from

the core operations of the company now regardless the level of the finished

goods inventory there are basically two types of industries that we need to look

at the first we would take the industries in which the finished goods

are the mass Diaby mass-produced right like like FMCG industry and the oil

industry for a company in such an industry the correct approach is to

maintain the finished goods inventory in a similar manner as the raw material

inventory is maintained that is you know the optimized level as per the demand of

in the market now there are two type of analysis one can do the

first one you know is the quantitative analysis that is by the inventory

turnover ratio and under this the technique you know the ratio is used for

the financial statement to calculate certain ratios to perform the ratio

analysis the common ratios is used to perform the ratio analysis regarding the

inventory management of the company are the inventory days and the inventory

turnover of the inventory to sales ratio the second way of analyzing is by the

qualitative analysis now if you see by this under the qualitative technique as

an analyst reads the notes to the financial statements he tries to

understands the the inventory valuation methods use like

like FIFO they use also another form another method that's called lifo, wam

that is weighted average method and so on and so forth so to make a final

conclusion on this inventories are basically the assets that will have been

converted into the final products company and there are

three major types which we know the management of the inventory calls for

the optimum level of the inventory that can be maintained by creating an

inventory purchasing plan as for the strategy adopted by the company.

Inventory analysis can be you know as we saw qualitative and quantitative the

former uses the ratio analysis which includes historical as well as the pure

company and the later that is the qualitative analysis uses the valuation

methods used for company for reporting its inventory. So by carrying both this

type of inventory analysis and an analyst can get a good idea of how well

or poorly a company has been in its various types of inventories so that's

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