Explain the types of inventories held by merchandisers and manufacturers, and understand how inventory costs flow through a company.

- Merchandising companies hold one type of inventory.

- Manufacturing companies have three types of inventory-raw materials, work-inprocess, and finished goods.

- When goods are purchased, the cost of the purchase is recorded in inventory (for merchandisers) or raw materials inventory (for manufacturers). During the production process, manufacturers record the cost (raw materials, labour, and overhead) in workin-process and then transfer the cost to finished goods inventory when the product is complete.
- Once the product is sold, the cost is transferred out of the inventory account (either Inventory or Finished Goods) and into Cost of Goods Sold to match it with Sales Revenue.
- The relationship between inventory and cost of goods sold is described by the cost of goods sold model.