For many businesses, inventory is a large part of the firm’s capital assets. In addition, an accurate tally of the goods and raw materials available is required for financial statements such as a company’s balance sheet. These factors make careful measurement of inventory value essential. Accountants use multiple measures, including net and absolute inventory, to better track the cost of inventory and quantities actually available for sale.
Two Metrics for Inventory Value
Absolute, or total, inventory is the cost of all of the goods and raw materials a company should have on hand if there are no losses due to spoilage or other factors. That’s rarely the case, so accountants also measure net inventory. Net inventory is the total inventory minus allowances for reserve inventory and allocated goods and materials. In other words, net inventory is what a business actually has available for sale. Reserve inventory is an allowance made by accountants for damaged, missing and obsolete items that must be written down in value. Accountants also exclude from net inventory the value of items allocated to promotional events or earmarked for specific customers.
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