Question

1. Describe the following inventory accounts for manufacturing companies. Compare type of inventory accounts for a merchandising company. • Raw Materials - • Work in Process - • Finished Goods- 2. What are the accounts that you will see in an Income Statement for a manufacturing company that you do not see in an Income Statement for a merchandising company? 3. What is the basic equation for inventory accounts?

Answer 1

1. Raw materials - Raw materials are the basic materials that are used to produce goods. It is also known as unprocessed material or primary commodity.

Work in process - These are partially finished goods waiting for completion and eventually these will be sold. These needs further processing. These are also known as work in progress, goods in process or in process inventory.

Finished goods - Finished goods are those goods that have completed the manufacturing process but have not yet been sold or distributed to the end user.

A manufacturing company will have all three types of inventory i.e. raw material, work in process and finished goods. But a merchandising company will have only finished goods as they are trading company and deal in resale of traded finished goods.

2. The accounts that we see in the income statement of a manufacturing company that we do not see in a merchandising company are manufacturing expenses, raw materials and work in progress inventory.

3. Basic equation for inventory accounts is

Cost of goods sold = Opening stock + purchases + direct expenses - closing stock