Definition: Finished goods inventory is the third group of inventory owned by a manufacturer and consist of products that are ready for sale. You can think of this like merchandise owned by a retailer. These goods are completely finished, made it through the production process, and ready for consumers to buy.
What Does Finished Goods Inventory Mean?
Finished goods inventory is a unique asset to manufacturers. Retailers don’t have to classify their inventory into segments because all of their inventory is completed and ready for sale.
Manufacturers, on the other hand, physically produce their inventory and have to account for it throughout the production process. It might be helpful to take a look at the production process. Let’s look at an example.
Example
When a manufacturer decides to make a product, it must order the basis stock needed to build the product. This stock could be bars of steel, sheets of metal, or blanks of plastic—anything in its raw form. The stock is classified as raw materials inventory.
These raw materials are machined and put through the assembly process. This process could take days or weeks. In the meantime, these goods are transferred from the raw materials account into the work in process inventory account.
After the goods have made it through the entire assembly line and are completely ready for sale, they are transferred out of the work in process account to the finished goods inventory account.
As you can see, this process allows a manufacturer to track how much inventory it has at any stage in the production process. At the end of a period, these three categories of inventory are usually stated separately on the balance sheet, so investors and creditors can understand the value of the inventory. In other words, finished goods are usually worth much more than raw materials. Investors and creditors want to know the mix of inventory rather than just having a total.
