Financial Merchandise Management

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Chapter 16

• Financial Merchandise Management

RETAIL MANAGEMENT A STRATEGIC APPROACH, 9th
Edition
BERMAN EVANS
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Chapter Objectives

• To describe the major aspects of financial
  merchandise planning and management
• To explain the cost and retail methods of
  accounting
• To study the merchandise forecasting and
  budgeting process
• To examine alternative methods of inventory unit
  control
• To integrate dollar and unit merchandising
  control concepts

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Financial Merchandise Management

• A retailer specifies which products are
  purchased, when products are purchased, and how
  many products are purchased
• Dollar control involves planning and monitoring a
  retailers financial investment in merchandise
  over a stated period
• Unit control relates to the quantities of
  merchandise a retailer handles during a stated
  period

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Benefits of Financial Merchandise Plans

• The value and amount of inventory in each
  department and/or store unit during a given
  period are delineated
• The amount of merchandise a buyer can purchase
  during a given period is stipulated
• The inventory investment in relation to planned
  and actual revenues is studied
• The retailers space requirements are partly
  determined by estimating beginning-of-month and
  end-of-month inventory levels

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Table 16.1 Handy Hardware Store Profit-and-Loss
Statement
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Benefits of Financial Merchandise Plans

• A buyers performance is rated. Measures may be
  used to set standards
• Stock shortages are determined and bookkeeping
  errors and pilferage are uncovered
• Slow-moving items are classified leading to
  increased sales efforts or markdowns
• A proper balance between inventory and
  out-of-stock conditions is maintained

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Inventory Accounting Systems

• The cost accounting system values merchandise at
  cost plus inbound transportation charges
• The retail accounting system values merchandise
  at current retail prices

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Cost Method of Accounting

• The cost to the retailer of each item is recorded
  on an accounting sheet and/or is coded on a price
  tag or merchandise container
• Can be used with physical or book inventories
• Physical inventory actual merchandise count
• Book inventory - recordkeeping

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Physical Inventory System

• Ending inventory - recorded at cost is
  measured by counting the merchandise in stock at
  the close of a selling period
• Gross profit is not computed until ending
  inventory is valued
• Gross profit derived during full merchandise count

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Book Inventory System

• Keeps a running total of the value of all
  inventory on hand at cost at a given time
• End-of-month inventory values can be computed
  without a physical inventory
• Frequent financial statements can be prepared

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Disadvantages of Cost-Based Inventory Systems

• Requires that a cost be assigned to each item in
  stock
• Do not adjust inventory values to reflect style
  changes, end-of-season markdowns, or sudden
  surges of demand

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Figure 16.1 Applying FIFO and LIFO Inventory
Methods
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Table 16.2 Handy Hardware Store Perpetual
Inventory System
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The Retail Method

• Closing inventory is determined by calculating
  the average relationship between the cost and
  retail values of merchandise available for sale
  during a period

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Determining Ending Inventory Value

• 1. Calculating the cost complement
• 2. Calculating deductions from retail value
• 3. Converting retail inventory value to cost

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Table 16.3 Handy Hardware Store, Calculating
Merchandise Available for Sale at Cost and at
Retail
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Table 16.4 Handy Hardware Store, Computing Ending
Retail Book Value
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Table 16.5 Handy Hardware Store, Computing Stock
Shortages and Adjusting Retail Book Value
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Table 16.6 Handy Hardware Store, Profit-and-Loss
Statement
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Advantages of the Retail Method

• Valuation errors are reduced when conducting a
  physical inventory since merchandise value is
  recorded at retail and costs do not have to be
  decoded
• Because the process is simpler, a physical
  inventory can be completed more often
• Profit-and-loss statement can be based on book
  inventory
• Method gives an estimate of inventory throughout
  the year and is accepted in insurance claims

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Limitations of the Retail Method

• Bookkeeping burden of recording data
• Ending book inventory figures correctly computed
  only if the following are accurate
• Value of beginning inventory
• Purchases
• Shipping charges
• Markups
• Markdowns
• Employee discounts
• Transfers
• Returns
• Sales
• Cost complement is an average based on the total
  cost of merchandise available for sale and total
  retail value

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Figure 16.2 The Merchandise Forecasting and
Budgeting Process Dollar Control
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Table 16.7 Handy Hardware Store, A Simple Sales
Forecast Using Product Control Units
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Table 16.8 Handy Hardware Store, 2003 Sales by
Month
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Table 16.9 Handy Hardware Store, 2004 Sales
Forecast by Month
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Figure 16.3 A Checklist to Reduce Inventory
Shortages Due to Clerical and Handling Errors
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Figure 16.4 Physical Inventory Systems Made
Simpler
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Figure 16.5 How Does a UPC-Based Scanner System
Work?
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Figure 16.6a How Stockouts May Occur
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Figure 16.6b How Stockouts May Occur
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Figure 16.7 Economic Order Quantity