 Hello, in this lecture we're going to talk about the idea of tracking inventory and recording inventory both in terms of the balance sheet as well as the income statement in the format of cost of goods sold. In our example we're going to be purchasing and selling forklifts, meaning we're going to purchase forklifts from the factory and then we're going to sell those forklifts. That means that forklifts to us will be inventory, they're inventory because we are purchasing the forklifts in order to resell them for the generation of revenue. That's really going to be the definition of inventory, the purchasing of something for the resell of it as opposed to if we were someone else purchasing the forklift in order to help us generate revenue in another way through the use of the forklift in which case it would then be property, plant and equipment. So it's the intended use of the forklift which will determine whether or not it will be an asset in the form of inventory or an asset in the format of property, plant and equipment. The first question we have here is how are we going to record this forklift on the balance sheet? How are we going to put it on the balance sheet? Will we put it on the balance sheet as one forklift? And obviously we can't do that. We're not going to put it on the balance sheet as one forklift. It seems obvious but we have to put it on the balance sheet in terms of dollars. In this case we're going to say we purchased the forklift for $15,000 therefore we're going to put it on the books at $15,000. This is similar to any other type of conversion. If we're converting from one type of currency to another type of currency if we're converting from inches to feet in the units of length then we have to do that same type of conversion. We're converting here in terms of units, $2. That kind of conversion can cause us problems and those are the problems we'll deal with as we go through some of these inventory tracking. The reason we know it's $15,000 at this point in time is because we purchased it for $15,000 on a free market. We could have purchased it with cash or we could have purchased it with some combination of cash or something like credit but the purchase price on a free market gives us that $15,000 amount. That $74,200 of inventory reported on the balance sheet in terms of dollars backed up in some way by these five forklifts. Now the problem happens when we actually sell the forklift. Let's say we're going to sell this one particular forklift to the customer. We know what the sales price can be because we're going to come up with the sales price and that's not a problem. The real problem is going to be the cost. What is the cost of that? How much of this $74,200 do we need to reduce it by when we sell that one forklift? We might say, well, why don't we just take the five forklifts and say it's the total was $74,200 and divide it by five and say that one forklift is worth $14,840. That is one way we can do it. That's a form of averaging the method but we might do it a different way in this particular case. We might take this $74,200, assign identification numbers and say this is ID number one, ID number two and so forth. That will allow us then to assign specific dollar amounts, meaning that number one cost is $15,000, number two cost is $14,600, number three cost is $14,400, meaning we're going to specifically identify, specifically track this information and track it by the actual cost of that individual item. That's going to be called specific identification. If we do that method then we can say, okay, that particular forklift, number one, the one we sold, that one cost $15,000. If we go to the journal entries it's important to note that there's a distinction between the cost and the sales price. The sales price might be based on the cost and so for example we might have the cost and have some particular markup, like a 30% markup and that might be how we come up with the sales price but note that the sales price is different than what we're typically doing in tracking the costs and when we move to cost tracking that often gets lost. Let's just say that we're going to record the sale first. The sale is the $16,000. Has nothing to do with the inventory cost in this particular problem. We're going to give that here. We're going to say $16,000 accounts receivable. We sold it on account and sales go up by $16,000. Where our tracking comes into play is when we're going to say, okay, how much does inventory go down by? It goes down by that $15,000 that we sold and the related cost of goods sold will be going up bringing net income down. We're going to say that inventory that is going to be reduced by that particular item for $15,000 worth of forkliftness and the expense of cost of goods sold is going to go up by that $15,000 bringing net income down and of course the sales on the income statement is going to go up by the $16,000 so there's a net gain of the $1,000 net income effect in that case. Now we're saying that that $74,200 is now going to be backed up by our subsidiary ledger backed up by ID number backed up by specific identification adding up the $14,600 to $14,400, the $14,200, the $16,000 given us the $59,200 in inventory after that sales point. That $59,200 then is of course what will now be on the balance sheet. Now what we've used here is specific identification. The reason we would do that is because the forklifts are fairly large. We probably don't have a lot of them in comparison to other types of inventory and they could be different in nature. They may not be exactly the same. They might have different colors and different features. If we were selling something that was completely the same and we had a whole lot of them things like coffee mugs or something specifically identifying all the coffee mugs like this might be not worth our time. Therefore we might not want to track exactly which coffee mug we then sell. If we have small things that are going to be all the same we might want to use some estimating method. Those estimating methods will be things like first in, first out, the average method and last in, first out which we'll talk about next time.