Hi.
[INAUDIBLE] here.
And in this video, you'll be learning about basic purchases
and sales of inventory under the perpetual inventory system.
Let's first recall all the accounts
we'll need to use in order to record inventory
transactions by a merchandiser.
Inventory is a finished good that merchandisers buy today
so they can generate revenue by reselling it to their customers
for more tomorrow.
Inventory is most often a current asset,
because it's sold in the upcoming 12 month,
although that really depends on the industry
the merchandiser is in.
Cash is a current asset because it's
controlled by the business, has future benefits
since it can be used to generate revenue,
and is due to an in-flow from a past transaction.
Accounts receivable, often called AR,
is also a current asset.
It represents the legal right to collect cash from customers
due to a past sale.
The cash will be collected at some point in the future.
Accounts payable, called AP, is a current liability.
It represents a future obligation
to pay your supplier due to something
you purchased from them in the past.
Sales revenue belongs to the financial reporting element
revenues.
It's earned when a good is delivered.
Note the past tense.
The business has to have done their job,
completed what they had to do, before they can claim that they
have earned sales revenue.
Last is cost of goods sold, or cost of sales, which you know
belongs in the element expense.
It is the total value of all inventory
sold during the period.
It's an expense, because it is used to generate revenue.
Now that you know the accounts you will be using,
and the financial reporting elements they belong in,
let's remind ourselves of the questions
you should ask yourself whenever you analyze a business
activity.
Recall that these are divided into critical questions
and enhancing questions.
Let's start with the critical question.
What did the business get?
What did the business give away?
Using these critical questions should allow you to determine
the impact of the business activity,
but if you still don't understand the impact,
you can move on to the enhancing question.
What did the business earn?
What did the business use, consume, or incur
to help generate revenue?
What does the business owe to either creditors or owners?
These are the questions that you should ask yourself
every single time you read a business activity
and need to analyze its impact on the financial reporting
element.
OK, now you're ready to record basic inventory purchases
and sales.
We'll use Greene Inc. As our business.
Greene Inc. Is a wholesaler.
Recall that a wholesaler purchases inventory in bulk,
and then sells smaller amounts to retailers at a higher price.
It is then the retailers who will sell the product
to the public for even more.
Green Inc. Sells widgets to retailers.
You're likely thinking, what is a widget?
Well, a widget is, um, they're doohickeys or whatchamacallits,
thingamajigs.
Widget is a word we use in accounting for a small gadget
or mechanical device whose name is unknown.
It represents a product, a unit of inventory.
We use it when we don't want to name something.
Think of it as an electronic device
that will be invented, manufactured,
and sold in the future.
It represents an inventory item and that's why we use it,
because it can represent anything.
So Greene Inc. buys their widgets for $2 each,
and they sell them for $5 each.
They sell only to retailers, never to the public.
In order to follow along with these transactions,
I suggest you download the business activities
of Greene Inc. from my Dropbox.
The link is in the description of this video,
directly below the video.
As always, I recommend you read the business activities first
and analyze them using the critical enhancing questions,
before I solve it all for you.
That will enhance your learning.
Note that you can also download the transcript of this video.
It's also posted in my Dropbox.
And the link is immediately below this video.
Now that we've got the housekeeping out of the way,
we'll start analyzing the transactions for Greene
Inc. in our next video.