Inventory plays a key role when calculating profit, specifically gross profit. However, the dynamics related to inventory can be substantially incorrect from a cash flow perspective. For companies that make and sell inventory, this difference between what is represented on the income statement and what truly happens with cash can be significant. Inventory generally goes onto the profit and loss statement only when it is sold.1 However, this can be very different, time wise, from when money was spent creating it.
There are three types of inventory: raw materials, work-in-process, and finished goods. Raw materials are the basic products and materials companies will buy anticipating converting them into salable products. This ...
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