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Ways to Analyze Inventory on the Balance Sheet

The balance sheet of a company shows how the business operates within a given accounting period. Also known as a statement of financial position, the financial performance of the company is determined by monitoring the elements of the balance sheet, namely, assets, liabilities and equity. One of the assets that needs to be managed is inventory.

In order to calculate inventory with accuracy, a business need to follow an inventory management system, like an inventory control guide, in order to gain efficiency in inventory operations and accuracy with the financial information. Take a look at the ways on how to analyze inventory on the balance sheet with the help of the balance sheet templates.

Analyzing Inventory on the Balance Sheet

While looking into the sample inventory on the inventory templates of this website, learn how to analyze inventory on the balance sheet by following the factors to be considered in order to understand the inventory on the balance sheet:

  • Using ratios related to inventory. There are financial ratios regarding inventory and income statement elements like sales and cost of goods sold that determine how inventory is affecting the overall financial performance of the business. Here is a list of the ratios:
    • Days Inventory Outstanding – This defines the number of days inventory is stored before selling it.
    • Inventory Turnover – This determines how fast the inventory is sold to consumers.
    • Inventory to Sales Ratio – This ratio provides an overview of how investment in inventory is growing as compared to sales.
  • Reading the notes to financial statements. Another essential way to analyze inventory is using supplemental notes to financial contain the valuation methods and inventory system the company is following to manage their inventory.
  • Identifying the risks of too much inventory. The amount of inventory on the balance sheet will determine how well the company is managing inventory. If there is too much inventory, the following risks that can harm the financial performance of the business:
    • Risk of inventory becoming obsolete
    • Risk of spoilage in inventory
    • Risk of shrinkage in inventory

Benefits of Inventory Analysis

Analyzing inventory, even those based on certain inventory template samples, on the balance sheet is an essential business practice due to the following benefits:

  • To improve inventory policies for better inventory control. Controlling of inventory is one of the inventory management tools a business follows. With the use of inventory analysis as seen on inventory templates in PDF, the stakeholders involved would know what policies to focus and to work on to achieve a good inventory amount on the balance sheet.
  • To aid in management’s decisions toward business assets. The strategies on handling inventory instructed by management are based on the generated inventory analysis for the financial statements of the company like the income statement and the balance sheet.
  • To achieve the return on investment required for the business. Most printable inventory templates highlight management tactics on how to gain the return of investment they want. By analyzing the inventory on the balance sheet, they would know how to deal with inventory to attain the return on investment needed to continue the business.

Knowing the ways on how to analyze inventory on the balance sheet will help us in understanding why inventory is one of the vital assets of a business particularly for business industries dealing with the manufacturing and the selling of goods.

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