Chapter 16

Financial
Merchandise
Management
RETAIL
MANAGEMENT:
A STRATEGIC
APPROACH,
10th Edition

BERMAN EVANS
 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 retailer’s investment in
merchandise over a stated period
* Unit control relates to the quantities of
goods 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 retailer’s 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
Sales $417,460
Less cost of goods sold: $ 44,620
Beginning inventory (at cost) 289,400
Purchases (at cost) 2,600
Transportation charges $336,620
Merchandise available for sale 90,500
Ending inventory (at cost) $246,120
Cost of goods sold $171,340
Gross profit
Less operating expenses:
Salaries $ 70,000
Advertising 25,000
Rental 16,000
Other 26,000
Total operating expenses 137,000
Net profit before taxes $ 34,340

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 Benefits of
Financial Merchandise Plans
 A buyer’s 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

 Require 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
Date Beginning-of-Month Net Monthly Monthly Sales End-of-Month
Inventory Purchases Inventory
7/1/06 $90,500 $40,000 $ 62,400 $68,100

8/1/06 68,100 28,000 38,400 57,700

9/1/06 57,700 27,600 28,800 56,500

10/1/06 56,500 44,000 28,800 71,700

11/1/06 71,700 50,400 40,800 81,300

12/1/06 81,300 15,900 61,200 36,000

TOTAL $205,900 $260,400 (as of 12/31/06)

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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 At Retail

Beginning Inventory $ 90,500 $139,200

Net Purchases 205,900 340,526

Additional Markups __ 16,400

Transportation Charges 3,492 __

Total Merchandise Available $299,892 $496,126

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 Table 16-4: Handy Hardware Store
Computing Ending Retail Book Value

Merchandise available for sale (at retail) $496,126

Less deductions:
Sales $422,540

Markdowns 11,634

Employee discounts 2,400

Total deductions 436,574

Ending retail book value of inventory $ 59,552

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 Table 16-5: Handy Hardware Store - Stock
Shortages and Adjusting Retail Book Value

Ending retail book value of inventory $ 59,552

Physical inventory (at retail) 56,470

Stock shortages (at retail) 3,082

Adjusted ending retail book value of inventory $ 56,470

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 Table 16-6: Handy Hardware Store
Profit-and-Loss Statement
Sales $422,540
Less cost of goods sold:
Total merchandise available for $299,892
sale
Adjusted ending inventory 34,136
Cost of goods sold $265,756
Gross profit $156,784
Less operating expenses:
Salaries $ 70,000
Advertising 25,000
Rental 16,000
Other 28,000
Total operating expenses 139,000
Net profit before taxes $ 17,784

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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
 Ending book inventory is 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: Merchandise Forecasting and
Budgeting Process: Dollar Control

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 Table 16-7: Handy Hardware Store
Sales Forecast Using Product Control Units
Product Control Units Actual Sales Projected Growth/ Sales Forecast
2006 ($) Decline (%) 2007 ($)
Lawn movers/snow blowers 200,000 +10.0 220,000
Paint and supplies 128,000 + 3.0 131,840
Hardware supplies 108,000 +8.0 116,640
Plumbing supplies 88,000 -4.0 84,480
Power tools 88,000 +6.0 93,280
Garden supplies/chemicals 68,000 +4.0 70,720
Housewares 48,000 -6.0 45,120
Electrical supplies 40,000 +4.0 41,600
Ladders 36,000 +6.0 38,160
Hand tools 36,000 +9.0 39,240
Total year 840,000 +4.9 881,080

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 Table 16-8: Handy Hardware Store
2006 Sales by Month
Month Monthly Actual Sales ($) Sales Index
January 46,800 67
February 40,864 58
March 48,000 69
April 65,600 94
May 112,196 160
June 103,800 148
July 104,560 149
August 62,800 90
September 46,904 67
October 46,800 67
November 66,884 96
December 94,792 135
Total yearly sales 840,000
Average monthly sales 70,000
Average monthly index 100

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 Table 16-9: Handy Hardware Store, 2007
Sales Forecast by Month
Month Actual Sales Monthly Sales Index Monthly Sales Forecast 2007
2006 ($)
January 46,800 67 73,423 * .67 = 49,193
February 40,864 58 73,423 * .58 = 42,585
March 48,000 69 73,423 * .69 = 50,662
April 6,600 94 73,423 * .94 = 69,018
May 112,196 160 73,423 * 1.60 = 117,477
June 103,800 148 73,423 * 1.48 = 108,666
July 104,560 149 73,423 * 1.49 = 109,400
August 62,800 90 73,423 * .90 = 66,081
September 46,904 67 73,423 * .67 = 49,193
October 46,800 67 73,423 * .67 = 49,193
November 66,884 96 73,423 * .96 = 70,486
December 94,792 135 73,423 * 1.35 = 99,121
Total Sales 840,000 Total sales forecast 881,080
Average monthly sales 70,000 Average monthly forecast 73,423

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 Figure 16-3:
A Checklist to
Reduce
Inventory
Shortages

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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

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