Finished Goods Inventory
Finished Goods Inventory refers to the portion of total inventory that is comprised of completed products ready for sale. In the context of a manufacturing company’s balance sheet, this is the cost of the manufactured products that are yet to be sold.
These items have passed through the production process and are ready for delivery to customers. For a retail business, almost all inventory may be considered finished goods as they are already ready for sale to customers. But for a manufacturer, finished goods are only a part of the total inventory, which also includes raw materials and work-in-process inventory.
The value of the finished goods inventory can fluctuate based on the cost of production and the number of goods produced but not yet sold. It’s an important component of a company’s current assets and is included in the calculation of inventory turnover and other financial metrics.
For example, if Apple has 100,000 completed iPhones in its warehouses, waiting to be sold, these iPhones are considered the finished goods inventory. The cost associated with these iPhones— including the cost of raw materials, direct labor, and manufacturing overhead— will be reported as the finished goods inventory on Apple’s balance sheet.
Too much finished goods inventory can indicate a problem (like the goods are not selling well), and too little could mean lost sales if the company can’t meet customer demand. Thus, effective inventory management is crucial for companies to balance the need to meet customer demands and avoid unnecessary inventory holding costs.
Example of Finished Goods Inventory
Let’s consider a hypothetical example of a company that manufactures bicycles, which we’ll call BikeCorp.
Scenario:
As of the end of the first quarter, BikeCorp reports the following figures in its inventory:
- Raw materials (steel, rubber, etc.): $50,000
- Work-in-process (partially assembled bicycles): $30,000
- Finished goods (completely assembled bicycles ready for sale): $120,000
The Finished Goods Inventory of $120,000 represents the value of the completed bicycles that are ready to be sold to customers but have not yet been sold. This inventory is accounted for on BikeCorp’s balance sheet as a current asset.
If, in the second quarter, BikeCorp sells bicycles that cost $70,000 to manufacture, this $70,000 will be moved from the Finished Goods Inventory account on the balance sheet to the Cost of Goods Sold (COGS) account on the income statement.
So, the value of the Finished Goods Inventory on the balance sheet at the end of the second quarter will now be $50,000 ($120,000 – $70,000). This balance represents the cost of the bicycles that BikeCorp has ready for sale but hasn’t yet sold.
This example illustrates how Finished Goods Inventory is reported and how it changes with the sale of goods. The monitoring and management of Finished Goods Inventory levels are important aspects of a company’s overall inventory management and financial performance. High levels of finished goods may suggest weak sales and could result in high storage costs or write-downs for obsolete inventory, while too low levels could mean missed sales opportunities.
