What is Finished Goods Inventory?

Finished goods are goods that have been completed by the manufacturing process, or purchased in a completed form, but which have not yet been sold to customers. Goods that have been purchased in completed form are known as merchandise.

How to Calculate Finished Goods Inventory

To calculate the amount of finished goods inventory, subtract the cost of goods sold from the cost of goods manufactured, and then add the ending finished goods value for the preceding reporting period. The formula is as follows:

(Cost of goods manufactured - Cost of goods sold) + Prior ending finished goods value = Finished goods inventory

For this calculation, the cost of goods manufactured is calculated as the beginning amount of work-in-process inventory plus the total manufacturing cost for the reporting period, minus the ending work-in-process inventory. The formula is as follows:

(Beginning work-in-process inventory + Total manufacturing cost) - Ending work-in-process inventory = Cost of goods manufactured

For the finished goods inventory calculation, you will also need the cost of goods sold. This is calculated as the beginning inventory plus all purchases made during the period, minus the ending inventory. The formula is as follows:

(Beginning inventory + Purchases made) - Ending inventory = Cost of goods sold

Accounting for Finished Goods Inventory

The carrying amount of finished goods inventory is at the cost of the acquired goods, plus any applicable freight in charges and taxes. If the goods were manufactured by the business, then the carrying amount of the inventory is the aggregate cost of the direct materials, direct labor, and factory overhead used to create them. This amount may be reduced by any impairment, which occurs when the net realizable value of the goods is less than their carrying amount.

Presentation of Finished Goods Inventory

The cost of finished goods inventory is considered a short-term asset, since the expectation is that these items will be sold in less than one year. The total amount of finished goods inventory on hand as of the end of a reporting period is typically aggregated with the costs of raw materials and work-in-process, and is reported within a single "Inventory" line item on the balance sheet. A sample presentation of this aggregated amount of inventory appears in the balance sheet in the following exhibit.