Capital budgeting including decision making techniques for decision

In this presentation we will take a look at some of the differences within the balance sheet for a manufacturer.

A company that produces inventory compared to a company that just purchases and sells inventorya

service compan

And clearly the difference is going to be related to inventory.

So the major difference for a manufacturers balance sheet to a service company for example would be

that we're going to have inventory on the balance sheet that inventory will be reported as an assets

on the balance sheet.

Typically a current asset.

Now when we go from a company that just purchases and sells inventory to a company that actually manufactures

produces makes the inventory then the inventory could be broken out to components.

We're gonna have raw materials inventory.

We're going to have work in process inventory.

We're going to have finished goods inventory.

Now these may be grouped on the balance sheet in different ways within inventory be broken out into

subcategories of raw materials working process or finished goods or be consolidated in some way.

But we're gonna have to contend with these components of inventory as we go through the production process.

These are going to be balance sheet accounts that we're going to have to track and work through as we

track the inventory.

You can imagine the physical flow of the inventory going through these inventory cycles so if we make

inventory for example we're going to have raw materials.

If we make guitars those raw materials would things be things like the wood for the guitar.

The wood would then be transferred to the work in process work and process is still inventory but we

can't sell it yet because it's in process.

So this is the inventory that we're making.

The wood has started to be converted to a guitar but it's not there yet it still has value it's still

inventory but of course these two components of inventory are things that we cannot yet sell within

work and process.

You can also imagine not just the raw materials as we see here but we're going to include other things

in that work and process which is going to include the direct labor and the overhead.

So as you think of these three components of inventory it's often easy to start to think well the raw

material went here and then it changed to work in process and then we finished it and it went to finished

goods as we go through that process we're going to emphasize the fact that it's not just the raw materials

that are being here and work and process it's going to include the direct labor and the overhead within

that process and then that's going to be converted to the finished goods.

So once we're done then we can sell the guitar it's ready to be sold we can put it on the market here

it will be within finished goods that we can then sell after it's sold then of course it can move to

cost of goods sold on the income statement as we would for a normal type of company and managed merchandising

a company that would just purchase and sell goods.

So once it's in the finished goods state then we're in a similar state as we would be for a merchandiser

ready to sell that the next step of course would be that sale the next step would be us recording the

expense in the form of cost of goods sold.