The way to become a finished goods inventory goes through following steps:
a) Raw Material Inventory: Raw material that has not been used yet for the manufacturing of any product is kept under this head
b) Work-in-progress inventory: The product when not completely finished and certain part of the job is yet to be completed then it is shown as a work-in-progress inventory.
c) Finished Goods inventory: After the manufacturing of the product and until it is sold, it is called as FGI (Finished Goods Inventory)
The cost of finished goods is considered as a short term asset as it is likely to be sold within one year. The finished goods inventory is clubbed with the raw material inventory and work in progress inventory, under the head of inventory and shown on the asset side of a balance sheet.
Formula for calculating finished goods Inventory (FGI):
FGI = Beginning FGI + Cost of goods manufactured – Cost of goods sold
Example: Let us take that a company Mohan Manufacturing Limited makes electronic guitars. The company had $10000 worth of guitars unsold at the end of last year. This year the company further manufactures Guitars of market worth of $30000. The company manages to sell $35000 worth of guitars this year. Now FGI of the company is:
FGI = Beginning FGI ($10000) + Cost of goods manufactured ($30000) – Cost of goods sold ($35000)