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Definitions:
For the entities and institutions which are involved in the business of manufacturing or trading, products or items carried by them for the purpose of their business are accounted as assets for them. These items can be classified as either their Inventories (the items which are used to produce products sold or items bought with an intention to sale in normal course of business) or Spares (items bought and carried for the purpose of usage with the Property, Plant and Equipment).
Inventories can be further categorised into more detailed classification based on its level of processing performed. Categories are as follows:
Raw Materials: Material bought and stored in their original purchased form for further consumption in production of finished goods.
Work-In-Progress: Mixture or combination of raw materials, where the production process have began but not completed.
Finished Goods: Completed goods on which manufacturing process is completed and they are stored / ready for onward sale in normal course of business.
Traded Goods: Goods purchased with intention of onward resale under normal course of business.
Cost of inventories is measured till the warehouse. It includes all the costs incurred until the place of storage or place from where it will be consumed for the manufacturing process (in case of raw materials) and a place stored at until dispatched to customers. Cost of inventories include purchase cost of material, freight and transportation until place of storage, any non-refundable duties and taxes paid.