Inventories

All companies have to report the value of their inventory on their financial statements. For merchandising companies this is based on the cost to acquire the inventory (Purchase price, Freight, etc.) However, manufacturing companies MAKE the product that they plan to sell.

So, at the end of their fiscal year, or at any time that they need to report on inventory - it is very unlikely that everything that they are making (in order to sell) is in a completed state. There will be product that is partially complete. However, we cannot ignore these items - we have incurred costs to make them, so far - and as we have learned, all costs incurred to create the product (i.e. manufacturing costs) are considered part of inventory.

This leads manufacturing companies to categorize their inventory as follows;

Finished Goods: Product fully complete and ready for sale.
Work In Process: Product that is partially complete and still needs more work to be done for it to be ready for sale.
Raw Materials: Items which are the components needed to create the product. Not sold individually, used collectively in the manufacturing process to create the finished product to be sold.