Finished goods are products that have completed all stages of production and are ready to be sold to customers. These products have been through the full manufacturing process, from raw materials to completed items, and are stored in inventory until a customer purchases them.
Let’s take an example of a car manufacturer:
- Raw materials would include things like steel, rubber, glass, plastic, etc.
- Work-in-process (WIP) goods are those that are in the process of being converted from raw materials to finished goods. So, for our car manufacturer, a car on the assembly line that is not fully assembled would be considered WIP.
- Finished goods are the completed products ready for sale. So, for our car manufacturer, a completely assembled car ready to be sold to a dealership or customer would be considered a finished good.
The cost of these finished goods is reported on the balance sheet as finished goods inventory until they are sold. Once a finished good is sold, its cost is moved from the balance sheet to the cost of goods sold (COGS) expense category on the income statement.
Finished goods are crucial for companies because they represent the final product that generates revenue for the business. If a company has a significant amount of its assets tied up in finished goods inventory, it may indicate that the company is not selling its products as quickly as it produces them, which can tie up cash flow and lead to other financial issues.
Example of Finished Goods
Let’s take an example from the electronics industry:
Apple Inc. is a multinational technology company known for its consumer electronics, including the iPhone, iPad, and MacBook.
- Raw materials for Apple would include components like semiconductors, glass for screens, aluminum for cases, batteries, etc.
- Work-in-process (WIP) goods would include iPhones that are partially assembled. For example, the screen and case might be assembled, but the battery and semiconductors aren’t installed yet.
- Finished goods for Apple are the fully assembled products ready for sale to consumers. For instance, a completely assembled and packaged iPhone sitting in Apple’s inventory, waiting to be shipped to an Apple Store or directly to a consumer, is a finished good.
The cost of this finished iPhone is reported on Apple’s balance sheet as finished goods inventory until it’s sold. Once the iPhone is sold, its cost is then moved from the balance sheet to the cost of goods sold (COGS) expense category on Apple’s income statement.
Understanding the status of goods—whether raw materials, work-in-process, or finished goods—helps Apple and similar companies manage their production process more efficiently and make informed financial decisions.