Inventory is classified as assets that represent the products, raw materials, and components a business has in stock for the purpose of manufacturing, selling, or otherwise distributing. Businesses manage their inventory to ensure they have enough stock on hand to meet demand while minimizing excess that can incur carrying costs. For instance, a retail store's inventory is made up of the products on its shelves and in its warehouse. Similarly, a manufacturing company might have specific inventory categories: raw materials, work-in-progress, and finished goods.

Effective inventory management is critical as it impacts a company's operations and profitability. An organization must consider reorder points, safety stock, and just-in-time inventory systems, depending on its operations. Complexities arise with inventory valuation methods, such as FIFO (First In, First Out) or LIFO (Last In, First Out), which affect financial recording for cost of goods sold (COGS).

For example, imagine a bookstore preparing for the holiday season; it must forecast the expected demand to stock enough inventory without overloading its storage or tying up capital unnecessarily. These considerations highlight the importance of inventory as a vital part of business operations.