Inventory does not include:
a. Materials used in the production of goods to be sold.
b. Assets intended to be sold in the normal course of business.
c. Equipment used in the manufacturing of assets for sale.
d. Assets currently in production for normal sales
The correct answer and explanation is:
Correct Answer: c. Equipment used in the manufacturing of assets for sale.
Explanation:
Inventory is a current asset reported on the balance sheet that consists of goods or materials held by a company for sale or use in production. The definition of inventory can be broken down into several key components:
- Materials Used in Production: These are raw materials or components that are used to create finished goods. For example, a car manufacturer includes steel, tires, and glass as part of its inventory.
- Assets Intended for Sale: Goods that are finished and ready for sale to customers are also included in inventory. For instance, completed cars in a dealership’s lot are part of inventory.
- Assets Currently in Production: Work-in-progress (WIP) items, such as partially assembled products, are also part of inventory. For instance, an unfinished car still in the assembly line would fall under this category.
- Equipment Used in Manufacturing: This does not qualify as inventory. Equipment, such as machinery, tools, or production lines, is classified as a long-term fixed asset, not inventory. These are capital assets that facilitate the production process rather than being sold in the normal course of business.
Why Equipment is Not Inventory:
- Nature of Use: Equipment is used to produce inventory but is not itself intended for sale or consumption in production.
- Accounting Classification: Equipment is categorized under property, plant, and equipment (PPE) and depreciated over its useful life. In contrast, inventory is considered a current asset and is either sold or consumed in the production process within a short period.
Conclusion:
Inventory includes raw materials, WIP, and finished goods intended for sale. Equipment used in manufacturing falls outside this definition because it serves a different purpose—facilitating production rather than being part of it.