Question

Why is an ‘Inventory’ item considered as a current asset? How it is different from non-
current asset? Discuss the same with an example.

Answer 1

Before answering to this Question we should know what is Inventory, Current Assets and Non Current Assets.

Inventory:

Inventories are defined as an asset

1. that are used for sale in the ordinary course of business

2.that are used in the production process for such sales

3. that are in the form of materials or supplies that are undergoan in the production process or in the rendering of Services.

Raw materials, Work in Progress and Finished goods are considered as inventory.

Current Assets:-

Current Assets are all those assets that the Company can easily Sold or Consumed and can be converted into liquid Cash in the normal course of business with in the financial year. Cash, Accounts Receivable, Inventory and Supplies, Prepaid expenses and other liquid assets are examples of Current Assets.

Non Current Assets :-

Non current Assets are those assets that the Company held it for the long term run of the business and the full value will not be realised with in one accounting period.Land and buildings, Plant and Machinery, Long term investments, Patents etc. are examples of Non Current Assets.

Question :- Why is 'inventory' item considered as a Current Asset ?

Inventory are considered as current assets because it fullfill the requirments to be a Current Asset.

1. Inventory are held in the business for a very short period ; Upto sales.

2. It is easily Converted into Liquid Cash.

Question:- How it Different from non current Assets

Inventory never fullfill the requirments to be a Non Current Assets

1. A particular inventory never exist for a long period in the company in its long run.

2. Inventory are used for sale in the normal course of business and liquidity level is high as compared to Non Current assets.

Example:- Suppose X Purchases Some Inventory and Equipments used to convert

Inventory to Finished Goods.

1. The process of convertion of Inventory to Finished goods and Sales is a normal course of business and is a continuoes process and is the purpose of the business for which it is formed. It can be easily converted into liquid cash.

2. Equipment are sold only when the business productive capacity is exhausted and no longer required by the business.This not happen in the normal course of business.