Finished goods – What are finished goods?

Finished goods are products that have completed the manufacturing process but have yet to be sold to customers.

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Finished goods are inventory items unique to manufacturers. As retailers purchase their inventory in completed form, there’s no need to categorise or segment their inventory. Goods and products that have been purchased ready for sale are known as merchandise.

Inventory in manufacturing

Within manufacturing, there are three classes of inventory, ordered chronologically according to the production process:

1. Raw materials

2. Work in process

3. Finished goods

Items purchased as “raw materials” are used to produce finished goods. If the product is only partially completed, it’s called “work in process”. Once the product no longer requires processing and is ready to be consumed or distributed, it becomes “finished goods”.

However, finished goods is a relative term, and a seller’s finished goods may become a buyer’s raw materials. 

For example, a flour mill produces flour; they purchase grains as raw materials which are ground and packaged, then sold to bakeries as finished goods. For the bakeries, flour is a raw material used to produce their finished goods, bread and cakes.

Finished goods in accounting

The finished goods inventory is recorded on a company’s income statement as a short-term or current asset, as it’s assumed that the finished goods will be sold within a year.

At the end of the accounting period, the finished goods inventory is usually combined with raw materials and work in process under one single ‘Inventory’ line on a company’s balance sheet.

Finished goods will often undergo a markup, meaning that the price for which they’re sold is increased from the original purchase price. Markup amounts can differ, but it’s not uncommon for markups to be around 50% more than the price of the original manufacturer.