Classifying Merchandising and Manufacturing Companies’ Inventories
In Lesson 5, you were taught that Manufacturers convert Raw Materials into what the
Manufacturers call Finished Goods, and that when a Manufacturing company sells its
Finished Goods to a Merchandising Company, the merchandising Company calls the
Finished Goods it purchases its “Merchandise Inventory”. That is, the “Merchandise
Inventories” that Merchandisers purchase from Manufacturers are the same inventories”
that the manufacturers’ call their “Finished Goods”.
In this course, we focus primarily on accounting for Merchandising Businesses, although
we do ask that you learn the three types of inventories accounted for by Manufacturers in
their Balance Sheet, which are
Work-In-Process inventories are the intermediate production details and components that
manufacturers produce leading up to the final production of the Finished Goods.
example, when Lockheed Martin produces the F-35 Lightning II fighter aircraft, the
company first produces the center fuselage, which is a portion of the center part of the
airplane, and then later joins this component to other components the company has
produced, such as the wings, to produce an F-35. For Lockheed Martin, the center
fuselage and wings are Work-In-Process inventories, and the F-35 airplanes are Finished
In building the Work-In-Process (also called “WIP”) components,
Lockheed Martin purchases Raw Materials, such as titanium, fasteners, wirings, and
many other items from its Suppliers, and uses these Raw Materials in producing both the
WIP components and the Finished Goods airplanes.
Lockheed Martin, General Motors,
Ford, Boeing, and all other manufacturers use these same general inventory
classifications in their Balance Sheets to summarize the dollar values of their inventories.
That is, all manufacturers summarize the values of their inventories into just three
categories in their Balance Sheet: (1) Raw materials (2) Work-In-Process and (3)
Of course, these companies’ internal accounting systems (their ERP
systems) track the Raw Materials, WIP and Finished Goods at a much more detailed
level, including assigning part numbers, quantities and unit costs to each Raw material,
WIP and Finished Goods inventory item.
In your Managerial Accounting course (the second Accounting Principles course at TCC,
ACCT 2302 – Managerial Accounting) you will learn more about accounting for Raw
Materials, Work-In-Process and Finished Goods inventories, when you study Job-Order
Costing. In this course, you learn the Financial Statement categories for manufacturing
inventories, which are Raw Materials, Work-in-Process and Finished Goods, and that the
manufacturers’ Finished Goods are the same Goods that Merchandisers call
“Merchandise Inventory”, when they purchase Merchandise Inventory (Finished Goods)
from the Manufacturers.