Finished Goods Inventory: Definition & Formula

how to calculate finished goods inventory

In this guide, we’ll walk you through everything you need to know about finished goods inventory, from the basics of stock management to how to calculate your inventory value. By the end, you’ll be well on your way to keeping your shelves stocked and your business running smoothly. Even one mistake in your inventory accounting process can lead to an IRS audit.

Becoming Finished Goods Inventory: The Journey from Raw Materials to Finished Goods Inventory

The difference between finished goods and inventory is finished goods are ready for sale and shipment; inventory is any material or product that is used to make finished goods. Finished goods are valued by taking your starting inventory, adding your cost of goods purchased or manufactured, and subtracting the cost of goods sold. This way leadership and investors can accurately gauge inventory value by high-level insights into each inventory stage. That, importantly, gives them an idea of cash flow and how much cash is tied up in inventory. Work in process inventory (AKA work in progress or WIP inventory) is everything that happens to inventory in between raw materials and finished goods.

Everything you need to know about finished goods inventory

In accounting, the term “Inventory” describes a wide array of materials used in the production of goods, as well as the finished goods waiting to be sold. To help you understand more and apply this formula, we take an example of a textile company X producing silk. At the end of 2020, factory X had 1000 finished pieces of silk in stock that needed to be sold. If you forget to replenish inventory at the right time, you may not have enough stock left to meet demand.


In this comprehensive blog, we’ll dive deep into the intricacies of the finished goods inventory formula, revealing the secrets behind calculating your stock like a pro. Managing the supply chain of a manufacturing business requires storing your raw materials inventory in your warehouse or stockroom until they are needed for production by your operations team. This can help reduce your risk of running out of materials, avoid price fluctuations, and ensure quality control. The easiest way to calculate finished goods inventory is to use the finished goods inventory formula. The finished goods inventory formula is a calculation you can use to determine how many inventory items you manufacture or the number of products you hold ready for sale. In accounting, finished goods inventory is the specific number of inventory or manufactured items that you currently have in stock available for customers to purchase.

Step 3: Calculate COGM and COGS.

This includes every complete item in your inventory that does not require further manufacturing or assembly. Constantly calculating COGM, COGS, and finished goods inventory is a hassle. As a result, many ecommerce businesses outsource fulfillment and inventory storage to 3PLs (or third-party cost of goods sold for cleaning industry logistics providers). Managing inventory is one of the most demanding parts of running an ecommerce business. With so many moving parts, it can be difficult to keep track of all the inventory available for customers—especially as you expand into multichannel inventory management.

how to calculate finished goods inventory

You can record finished goods inventory on your balance sheet as a current asset. You should also track and record finished goods inventory value over time in a separate capacity. Finished goods inventory should be listed as one of your short-term assets on your company’s balance sheet. ShipBob’s analytics tool makes it easy to find the data your brand needs to make important decisions. Balance sheets, financial statements, income statements, and other financial documents must account for current assets — inventory being your biggest one.

The weighted-average cost method is the third most widely used accounting method after LIFO and FIFO. On the cash flow statement, the change in inventories is captured in the cash from operations section, i.e. the difference between the beginning and ending carrying values. There are a few reasons why finished goods inventory is so important for businesses. In this article, we will explain what is finished goods, how it is important, and especially by giving you not only the formula but also some examples. As your brand continues to grow, you may end up having to split inventory across multiple fulfillment centers to reach distant customers more quickly and affordably. In our example, your company’s finished goods inventory for the last quarter would be $500.

  1. Previously, our Inventory Planner was doing calculations to determine which SKUs needed to go where, but she doesn’t have to do that now.
  2. Suppose we are building a roll-forward schedule of a company’s inventories.
  3. This article breaks down how finished goods are calculated and some key inventory management methods for tracking them as they move through your business.
  4. The finished goods inventory formula is critical for deriving accurate inventory levels.
  5. In this case, there is no need to close out the WIP account at the end of the accounting period since it is already up-to-date.
  6. Sunset Fashion Boutique knows it has $35,000 worth of unsold inventory at the end of September.

But, as a rule, you want to minimize finished goods inventory to keep storage costs down. The point here is getting familiar enough with your finished goods inventory level that you can draw actually useful conclusions from it. One big benefit of learning how to figure out finished goods inventory is that you can find your finished goods inventory turnover rate. Finished goods inventory has a big effect on the cost of goods sold (COGS). That’s because a manufacturer creates revenue when finished goods inventory is sold.

On the other hand, raw materials like textile for manufacturing or spools of thread would not be considered finished goods since they can’t be sold as is. Knowing the optimal inventory levels for your business can save you money in the long run. Instead of spending a lot of money on warehousing an excessive amount of raw materials inventory and finished products, you can save by storing only what’s needed. There is a raw materials account, a WIP inventory account, and a finished goods inventory account. When manufacturing is complete, the WIP account is credited and the finished goods inventory account is debited. As savvy business owners and supply chain management enthusiasts, it’s crucial to understand the ins and outs of inventory management, and finished goods inventory is no exception.

Supply chain optimizations can always be made through automation or labor efficiency. By knowing the finished goods formula, you’ll be able to track direct labor costs and manufacturing costs to find opportunities to improve production processes and automation opportunities. It provides insights into the unsold inventory at the end of the accounting period which is essential for planning sales strategies, managing storage, and optimizing production schedules. Finished goods inventory refers to the stock of completed products that manufacturers have produced and are ready to be sold to customers, retailers, or other businesses.

The table below compares goods considered WIP inventory and finished goods. Finished goods inventory order of liquidity financial definition software comes in many forms, with different features for various applications and industries.

We’ll also delve into the significance of inventory turnover and provide valuable insights to help you optimize your stock management. Whether you’re an industry veteran or a newcomer, our easy-to-follow guide will equip you with the knowledge you need to excel in managing your finished goods inventory. Inspecting, testing, and packaging the finished goods inventory according to quality standards and customer specifications is another important aspect of the production process. The process of transforming raw materials into finished goods inventory involves several steps, as described below.

Both options have advantages and disadvantages in terms of cost, quality, availability, and environmental impact. Retailers will typically refer to finished goods as merchandise inventory. For Year 1, the beginning balance is first linked to the ending balance of the prior year, $20 million — which will be affected by the following changes in the period. The impact on net income depends on how the price of inventories has changed over time.