In a manufacturing company, some inventory may not yet be ready for sale. As a result, manufacturers usually classify inventory into three categories: finished goods, work in process, and raw materials.
Finished goods inventory is manufactured items that are completed and ready for sale.
Work in process is that portion of manufactured inventory that has been placed into the production process but is not yet complete.
Raw materials are the basic goods that will be used in production but have not yet been placed into production.
For example, Caterpillar classifies earth-moving tractors completed and ready for sale as finished goods. It classifies the tractors on the assembly line in various stages of production as work in process. The steel, glass, tires, and other components that are on hand waiting to be used in the production of tractors are identified as raw materials.
By observing the levels and changes in the levels of these three inventory types, financial statement users can gain insight into management’s production plans.