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"Finished goods" are products that have gone through all manufacturing processes, but have not yet sold. A finished good can serve as a piece of inventory for a store or sit in storage in a warehouse. Finished goods do not make money for a business until they are purchased, though they do count as assets.
There are three names for a product when it undergoes the manufacturing process. "Raw materials" are used to make the final product. "Unfinished goods" have not yet completed the manufacturing process. "Finished goods" are the third and final stage of manufacturing, when there is no more work to be done on the product.
Examples of finished goods include clothing, processed food, and appliances. Something like an orange is not considered a finished good, though it is sold and shipped. Orange juice, however, requires processing and would be listed as a finished good.
In accounting, finished goods are used to calculate profit. When finished goods are not yet sold, it is registered on the balance sheet as a debt. After sale, it is a credit. At the end of a fiscal period, the difference between goods sold and goods in inventory is calculated. This resulting number is the gross profit of the business.
Calculating the cost of finished goods is an important part of starting a successful business. The amount of time needed for manufacture and the cost of raw materials and labor are all elements that need to be considered. If the cost of any of these elements is greater than the price for the final product, cheaper alternatives will have to be found. Otherwise, the business may go into debt or fail.
Because they do not create any profit until they have been sold, some manufacturers have developed the process of "just in time" shipping so that a product can be sold immediately rather than sitting on a warehouse floor. Businesses hold sales and make price reductions to keep their finished goods circulating in stores. Conversely, goods which have not been sold will also count in a company's total assets. Even though they are not yet sold, the overall worth of a finished good is used when totaling up how much a business is worth. This can help predict future cash flows or be compared with past assets to gauge a company's growth.
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