Inventory is a key item in current assets and will appear in most company's balance sheets In trying to value inventory, it's the normal cost of production So we need to ask ourselves, well what's going to be involved in that? Well inventory can be made of a number of things Let's imagine the inventory for a phone manufacturer Well this might include raw material X (maybe some plastic), raw material Z (maybe some glass) And component Y (maybe some microchips) as well as many other things It may include some WIP (work in progress), so half finished phones It will also include the cost of production, say the production labour Those people, they're receiving salaries and of course that salary (or their work) goes into making up the phone So their salaries have to be added into the value of that phone as well And on top of that, we may have depreciation of assets that have helped make the phone Maybe depreciation of some machinery And the factory where the machines are working to make those phones Well we need to include overheads from those factories (maybe heating and lighting bills) So there's a lot of things that go into inventory and inventory affects a number of items in the financial statements Inventory affects COGs. And if it affects COGs it then affect profits, retained earnings and shareholders' equity It also affects the value of current assets and thus total assets and working capital So making sure that we value inventory correctly is crucial