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Hi, and welcome to part four,
Inventory.
In this HSTalks lecture series
on Analyzing Financial Statements.
My name is David Bond.
In this video, we'll look at
how to account for inventory.
Not withstanding
the increasing emergence
of the service industry
and the knowledge economy.
The sale of goods is still
the lifeblood of many businesses.
0:21
When it comes
to accounting for inventory,
there are
two primary considerations.
The first, is how to account
for the purchase of inventory
and the second, is how to account
for the sale of inventory.
0:32
But before we get started,
what is in inventory?
Inventories are assets
held for sale
in the ordinary course of business,
for example,
shoes in a retail store,
in the process of production
for such sale,
for example, unfinished shoes
being manufactured for sale
often referred
to as work in progress
or in the form of materials
or supplies
to be consumed
in the production process
or in the rendering of services,
for example, the leather to be used
in the manufacture of the shoes.
0:59
The intent of the entity
is important here
as to whether a particular thing
is classified as inventory
or something else,
for example,
an airline manufacturer
like Boeing,
selling planes is what they do,
as such, when you look at
their balance sheet,
planes will appear as inventory,
however,
for an airline like Qantas,
they use planes
for wide transportation services,
as such,
the very same planes for Qantas,
would not be treated as inventory,
rather it would be treated
as property plant and equipment,
which we'll look at in part five.
1:30
Regardless
of whether the inventory purchased
is the raw materials
or the finished product,
the entity will record
the inventory purchased as an asset
in the balance sheet.
This would mean the journal entry
would be debit inventory,
credit cash, if the inventory
was paid for in cash
or debit inventory
credit accounts payable,
if the inventory
was purchased on account.
Now that we have the right account,
we need to work out
what amount gets recorded.
According to the standards,
the cost of inventories
includes all cost of purchase,
cost of conversion,
and other costs incurred
in bringing the inventories
to their present location
and condition.
