On the balance sheet, inventory costs of a manufacturing firm are bbroken up into three sub-accounts:...

On the balance sheet, inventory costs of a manufacturing firm are bbroken up into three sub-accounts: raw materials, work in process inventory, and finished goods inventory. Explain why this is done. As a potential investor, how would you use this information? If you were a banker, about to give bowing a loan for raw materials, how would you use this information when making a decision whether or not to make a loan?

Expert Solution

Inventories are classified into raw material, WIP and Finished goods to get the current status of the items in inventory because at a time purchase department has to ensure timely supply of raw material to production department and production department needs to fulfill the requirement of sales department to fulfill the sales order. A clear classification helps in proper inventory management and a proper co-ordination between store department, purchase department, production department and sales department.

As a potential investor i would like to check the short term solvency of the company by analysing the quick ratio and with the help of this classification i can make a understanding of how much of total assets are comprised in raw material, WIP and in finished goods.

A bank manager can check the inventory turnover ratio and inventory holding period to know the effect of inventories on sales and the times inventory keeps in stores

ekkarill92 answered 1 year ago

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