What do inventories consist of?

Inventories are an essential component of a company's balance sheet and typically comprise three main categories: raw materials, work in progress (WIP), and finished goods.

Raw materials are the basic inputs that are used in the production process. These are the items that have not yet undergone any transformation. Work in progress refers to items that are in the process of being manufactured but are not yet complete. Finally, finished goods are the completed products that are ready for sale. This comprehensive view allows a company to manage its resources effectively and respond to demand fluctuations.

By including all three categories—raw materials, work in progress, and finished goods—this choice accurately reflects what constitutes a company's inventory, making it the correct answer. This broad definition is crucial for businesses in tracking inventory levels, assessing production efficiency, and planning for demand, ultimately contributing to effective inventory management strategies.