ShmoopTube

00:00

finance a la shmoop what is work-in-process inventory well you're a

00:08

car assembly company named Shmord for any given car you have to buy a ton or [Lots of cars in a parking lot]

00:15

two of steel and four tires couple of windshield wipers a bunch of [Wipers on in the rain]

00:19

hoses wires vats a glass carpet and yards of rich Corinthian leather [Pictures of the materials]

00:24

with none of this stuff yet assembled into the car you're gonna sell it to a

00:29

dealership for twenty eight thousand eight hundred twenty three dollars it's [All the materials in a list]

00:32

just the inventory that is work in the process of being built why is it

00:38

important well for a lot of companies their inventory is highly valuable and

00:43

it comprises a lot of the actual asset value of the company it's also something

00:48

that clever accounting can jerk around to make the books look better or worse [Guy reading an accounting book]

00:53

than they actually are like there's a mountain of tires sitting in a portable [Tires piling up]

00:58

warehouse 12 feet off of the perimeter the border of the factory just sitting [A warehouse covers the tires]

01:04

there has Shmord paid for them well they're kind of sort of delivered but

01:09

not really so do those tires get counted as inventory what if you dragged the

01:14

porter shed twelve to fourteen feet closer to the factory then are they [The warehouse comes up to the factory perimeter]

01:19

counted as delivered and then you have to pay for them so then maybe you do so

01:25

and you recognize them as an asset maybe okay you get it

01:30

lots of accounting tricks that can be played in the short run in this category [Guy juggling balls with dollar signs on]

01:33

eventually however work-in-process inventory is work in the process of

01:38

being built into a finished product but that's still sitting there in inventory [Someone welding a car]

01:42

not yet sellable to people and the big accounting trick of moving the P beneath [A pea is hidden under one of three walnut shells]

01:47

the walnut shells only fools investors for so long eventually they're gonna

01:52

focus on revenues and free cash flow profits to be sure if you're not [Someone swipes away the walnut shells to reveal the pea]

01:57

tricking them well the big idea in this term set is that inventory takes a few

02:01

different forms it can be raw like just plain old tires or even the rubber to [Picture of tires]

02:07

then go be made into tires like sitting in a shed somewhere inventory can be [Bricks of rubber are thrown into a shed]

02:12

half-baked like a semi assembled chassis or like a thousand of them just sitting

02:17

around waiting to be uploaded with an engine and body and hydraulics and a [Computer screen showing a progress bar with each component of the car appearing]

02:21

steering wheel and it goes along you know the assembly process until finally

02:25

at the end of all of that work in process inventory stuff is in fact [Guy talking in front of the Shmord factory]

02:31

magically then turned into actual inventory that is sellable to a client [New cars in storage]

02:36

got it or a buyer whatever you want to call them okay

02:39

we didn't say it had to be pretty inventory just inventory [Guy smiling walking up to a Shmord dealership and a tiny car appears]

Full Transcript