Final answer:
The three inventory accounts used by manufacturing companies are Raw Materials Inventory, Work-in-Process Inventory, and Finished Goods Inventory, representing different production stages, crucial for the flow of funds and GDP, and affected by business cycles and inflation.
Step-by-step explanation:
The three inventory accounts used by manufacturing companies are Raw Materials Inventory, Work-in-Process (WIP) Inventory, and Finished Goods Inventory. Each of these accounts represents a different stage of the production process.
- Raw Materials Inventory includes all the basic inputs or resources that are used to produce goods or services. These are the materials that are yet to be processed.
- Work-in-Process Inventory consists of items that are in the process of being manufactured but are not yet complete. This can include the cost of raw materials, labor, and overhead used in the production process.
- Finished Goods Inventory comprises items that have completed the production process and are ready for sale. Generally, this inventory is valued at the lower of cost or market value, complying with the conservative principle of accounting.
Managing these inventories efficiently is critical for a manufacturing business, influencing the flow of funds and impacting the National Accounts, in particular the Gross Domestic Product (GDP). Moreover, inventories play a significant role in the assessment of business cycles, and their valuation is influenced by prices & inflation rates, such as those measured by the Consumer Price Index (CPI) and the Producer Price Index (PPI).