Is Inventory a Fixed Asset? A Comprehensive Guide for 2023
In this article, we explore whether inventory is a fixed asset or not. We also cover why it is not and share some circumstances when it can be considered as one. Read on to learn more.
Is Inventory a Fixed Asset?
No, inventory is not considered a fixed asset. Inventory refers to items a business intends to sell, whereas fixed assets are long-term possessions a business uses for its operations and not for resale.
Example: A clothing store's racks of dresses and shirts are its inventory, meant to be sold to customers. In contrast, the store's cash registers and shelving units are its fixed assets, used to facilitate sales and display products but not intended for sale themselves.
Why is Inventory not a Fixed Asset?
Here are a few reasons why inventory is not a fixed asset:
The primary purpose of inventory is to be sold, either as-is or after some processing, while fixed assets are utilized in business operations for a prolonged period.
Inventory turnover happens within a business cycle, sometimes within days or months. On the other hand, fixed assets have a lifespan of several years and can be used over that duration.
Inventory is typically valued at the lower of cost or market value. Fixed assets, meanwhile, are often recorded at their original cost and then depreciated over their useful life.
Cash Flow Impact:
The sale of inventory directly affects the revenue of the company, leading to an inflow of cash. On the other hand, the benefits from fixed assets are indirect and realized over a more extended period.
Can Inventory be a Fixed Asset?
In conventional accounting, inventory is never classified as a fixed asset. However, from a strategic or analytical standpoint, there can be scenarios or frameworks where inventory may be viewed with characteristics similar to fixed assets. Here are some hypothetical circumstances:
Specialized Inventory with Long Lifespan:
If a company produces or holds highly specialized inventory that has a long lifecycle and is not expected to be sold in the short term, this inventory could conceptually be viewed similarly to a fixed asset. For instance, a company producing aircraft or large machinery might have components that are held for years before they are used or sold.
Companies might maintain a strategic stockpile of certain commodities or items as a hedge against price volatility, supply chain disruptions, or geopolitical factors. In this context, the stockpile acts more like a long-term asset than a typical inventory.
Capitalization of Certain Inventory Costs:
In some industries, the costs associated with developing inventory (like wine aging in barrels or cheese aging in caves) could be capitalized over time, much like the depreciation of a fixed asset.
Vertical Integration Framework:
In a vertically integrated company, one segment's fixed asset could be another segment's inventory. For example, a timber company might own forests (a fixed asset) that supply logs to its milling operations (where they become inventory). Strategically, they might view the forests as both a fixed asset and an inventory of raw materials.
Real Estate and Land Development:
In real estate, land purchased for development might sit idle for years before being developed or sold. While land isn't depreciated like other fixed assets, its long-term holding perspective might make it seem like a fixed asset, though once development starts, its inventory status becomes clearer.
Art Galleries and Museums:
Artworks held for sale by galleries are inventory, but those artworks might be held for years or even decades before being sold. For a museum, even though the artwork is not "inventory" in a resale sense, it's an asset with long-term value appreciation, blurring the line between inventory and fixed asset.
Companies or entities that purchase commodities or goods not for resale but as an investment for future price appreciation might view such holdings similarly to fixed assets. For instance, holding gold bars as an investment versus selling them.
While these scenarios provide some conceptual overlap between inventory and fixed assets, it's crucial to remember that in strict accounting terms, inventory and fixed assets remain distinct categories.
We hope our article has now left you with a better understanding of why inventory is not a fixed asset and when it can be considered one.