Finished Goods Inventory: Calculation & Formula

Finished Goods Inventory: Calculation & Formula
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  • 0:00 What Is Finished Goods…
  • 1:33 Calculation
  • 3:32 Lesson Summary
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Lesson Transcript
Instructor: Tara Schofield
This lesson explains what finished goods inventory is, how it is calculated, and the activities that will cause a finished goods inventory to increase or decrease. Examples to illustrate finished goods inventory are provided.

What Is Finished Goods Inventory?

Finished goods are the items you have in inventory that are ready to be sold. The manufacturing and production process is complete, and the items are complete. The finished goods inventory is the amount of stock a company has to fulfill orders, ship to customers, and send to wholesale accounts. In accounting records, finished goods inventory is considered an asset item in the company's records.

Let's use an example of a craft store. As the owner, you order craft supplies to stock your shelves, and you also order many of the same supplies to create products that consumers can purchase as a completed projected. Most recently, you have started crocheting scarves that you sell in the store. You find that some of your customers don't know how to crochet or don't have the time to make their own scarves. But they love having a handmade scarf to wear or give as a gift.

It's time to place your order, and you decide to buy 100 skeins, or packages, of yarn at $1 per skein. You intend to put 80 skeins in inventory out in the store for customers to purchase. These 80 skeins of yarn are considered finished goods and are ready to be sold as is.

The other 20 skeins will be kept for the scarves you will crochet. These skeins are considered supplies because they must be produced into another product. They are not finished goods until they are ready to be sold after you have completed the manufacturing process and crocheted the yarn into scarves.

Calculation

There are three steps to calculating finished goods inventory:

Visually, the formula looks like this:

Finished Goods Inventory = Previous Finished Goods Inventory + Inventory Purchases - Inventory Deductions

To find the elements of the formula, the following information will need to be determined:

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