Finished goods definition
/What are Finished Goods?
Finished goods are products that have completed all aspects of the production process, and which are being held for sale. Products still in the production process are classified as work-in-process inventory.
Presentation of Finished Goods
Finished goods are typically aggregated into the Inventory line item in the balance sheet. Since finished goods are generally presumed to be sellable within one year, this line item is classified as a current asset on the balance sheet. It is usually listed just ahead of the fixed assets line item.
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Characteristics of Finished Goods
Several characteristics of finished goods are noted next. These characteristics vary in importance, depending on the business model being used.
Storage Requirement
A company with a fast delivery strategy may need to keep a large amount of finished goods inventory in stock, in order to ship all orders as soon as possible. Conversely, a business with a rock-bottom pricing strategy might keep no finished goods inventory on hand at all, preferring to instead manufacture only after orders are received.
Shelf Life
A company may want to minimize its finished goods inventory if the inventory has a short shelf life, and so is at risk of spoilage or obsolescence. Conversely, if the inventory can remain viable for long periods, it might make more sense to produce in large batches and keep significant quantities on hand. Or, if finished goods can only be purchased from a supplier in large quantities (such as by shipping container), then it may be necessary to deal with a prolonged shelf life while the goods are gradually sold off.
Collateral
Finished goods are considered to have significant value as collateral for a lender, since they can be sold off with no delay for finishing work. However, if the goods are fashion items, then their value may decline precipitously as soon as some other fashion trend takes over; this makes them less useful as collateral.
Finished Goods vs. Merchandise
Goods that have been acquired for immediate resale without any value-added activities are considered to be merchandise, rather than finished goods. Thus, retailers have merchandise in stock, rather than finished goods.