Inventory is assets held for sale or assets used to produce goods that will be sold as part of the

entity's normal business activities.

Raw materials The inputs into the production process. For example, raw materials inventory for a
furniture manufacturer includes wood used to build the furniture.

Work-in-process or WIP Inventory that is partially completed on the financial statement date. For a
car manufacturer, a partially completed car would be classified as WIP inventory.

Finished goods Inventory that has been completed and is ready for sale. Also, one entity's
inventory is another's equipment, and one entity's finished good is another's raw material. For example,
the ovens used to bake bread are equipment for the bakery but finished goods inventory to the company
that makes ovens. The flour and sugar used to make bread are the bakery's raw materials but finished
goods for the flour mill and the sugar refiner.

There are some important questions about accounting for inventory:

How should inventory be measured in financial statements?

What costs should be included in inventory?

How should inventory costs flow through the inventory account on the balance sheet to cost of goods
sold on the income statement?

What information should be disclosed?

Overhead is the costs in a manufacturing process other than direct labour and direct materials.
Overhead costs can be very difficult to associate directly with the product being made.