Inventory and Expenses: Tradeoffs or Gains?

In a business that usually sells products, the inventory is usually its largest current asset. An inventory is defined as any tangible property owned by the business that is held for sale or material that is being made ready for sale, otherwise known as work in process. An inventory can be raw materials or securities that are bought by a broker or made available for resale by a dealer. The cash amount paid by the business for an inventory is more than the recorded cost of goods sold expense if the ending inventory account is greater than the beginning inventory during a particular recording period. When this happens, the increase in inventory is deducted from the net income in determining cash flow from profit.

Prepaid expenses or the cost incurred to acquire goods or services expected for consumption within the business’s operating cycle are current asset accounts that work the same way as with the change in inventory and accounts receivable. Usually though, the changes in prepaid expenses lower than changes made in the change in inventory and accounts receivable asset records.

The prepaid expenses’ beginning balance is charged as outright expense for the current year although the cash has already been paid out in the previous year. The business then pays cash intended for the next period’s prepaid expenses for the current period. This causes a change in the cash flow for the present period but the net income remains the same.

It is necessary for a growing business to increase its prepaid expenses, which covers insurance premiums, which must be paid in advance of the coverage as contained in the policy, and office supplies. Usually, a business that has experienced a gain in sales revenue is also expected to raise their assets. An increase in current asset accounts such as prepaid expenses, accounts receivable and inventory expenses are cash flow tradeoffs that an expanding business has to be readily prepared to pay. It is very rare and unrealistic an occurrence for a growing business not to increase their current assets.

Businessmen, investors and managers should understand that a business always comes with certain tradeoffs, but they should try to have a positive outlook that these tradeoffs can be far off below what they can be able to gain. Because in the business world, the more the business progresses, the more it is likely to maximize on its investments or expenses.