After raw materials have gone through the entire production process, they become finished goods.

Finished goods are completed manufactured items that a company has produced for sale to customers.

The Finished Goods Inventory account shows the following information (also refer to the illustration below):

• Costs of finished goods inventory available at the beginning of an accounting period (i.e. beginning balance as a debit because inventory is an asset account).  The balance represents finished goods available for sale at the beginning of the period.
• Cost of goods manufactured (COGM) that were transferred from work-in-process inventory to finished goods during the accounting period (debit side).
• Cost of goods sold (COGS) during the period (credit side).
• Costs of finished goods available at the end of the account period.

Illustration 14: Finished goods inventory T-account

In our example, Friends Corporation will classify completed valves ready to be sold as finished goods. As we stated earlier, at the end of March 20X9 Friends Corporation finished manufacturing valves that cost $8,600, and the journal entry to record that was as follows (entry from the Work-in-Process topic repeated here for convenience):

To continue our example, let's assume that during March 20X9 Friends Corporation sold on account valves costing $7,900, and the sales price was $15,000. The $7,900 represents the Cost of Goods Sold (COGS). The journal entry to record the cost of goods sold is presented below (also refer to the illustration under the journal entry):

Let’s look at the Finished Goods Inventory T-account.  Assume that at the beginning of March Friends Corporation had a balance of $6,000 in this account.

Illustration 15: Friends Corporation finished goods inventory T-account

From other lectures, we recall that when finished goods are sold, two entries are posted: One to record the cost of goods sold and the other to record the sales revenue.  The COGS entry is shown above (entry # 9). The sale revenue journal entry is presented below:

Note that COGS decreases (credits) the Finished Goods Inventory account. COGS is recorded in the income statement after the Sales Revenue line; it is subtracted from Sales Revenue to calculate Gross Margin. We will discuss the income statement of a manufacturing company in more detail later in this lecture.

The below illustration shows the full cost accounting cycle (from raw materials to finished goods) for Friends Corporation during March 20X9.  For simplicity, T-accounts only show activity for the month and don’t show beginning and ending account balances.

Illustration 16: Cost flow from raw materials to work-in-process to finished goods