16-1 Retail Mgt. 11e (c) 2010 Pearson Education, Inc. publishing as Prentice Hall Financial...

16-1 Retail Mgt. 11e (c) 2010 Pearson Education, Inc. publishing as Prentice Hall

Financial Merchandise Management

RETAIL MANAGEMENT:A STRATEGICAPPROACH11th Edition11th 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


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.


Benefits of Benefits of Financial Merchandise PlansFinancial 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.


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.

Benefits of Benefits of Financial Merchandise Plans (cont.)Financial Merchandise Plans (cont.)


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


Table 16-1: Handy Hardware Store Profit-and-Loss Statement


Cost Method of AccountingCost 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


Physical Inventory SystemPhysical 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 is derived during full merchandise count.


Book Inventory SystemBook Inventory System

Keeps a running total of the value of all inventory on hand and at cost at any given time.

End-of-month inventory values can be computed without a physical inventory.

Frequent financial statements can be prepared.


Disadvantages of Cost-Based Inventory Disadvantages of Cost-Based Inventory SystemsSystems

They 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


Table 16-2: Handy Hardware Store Perpetual Inventory System


Figure 16-1: Applying FIFO and

LIFO Inventory Methods


The Retail MethodThe 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.


Determining Ending Inventory Value

1. Calculating the cost complement2. Calculating deductions from retail

value3. Converting retail inventory value

to cost


Table 16-3: Handy Hardware Store — Calculating Merchandise Available for Sale


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


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


Table 16-6: Handy Hardware Store –Profit-and-Loss Statement


Advantages of the Retail MethodAdvantages 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.


Limitations of the Retail MethodLimitations of the Retail MethodBookkeeping burdenEnding 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.


• Dollar control entails planning and monitoring a firm’s inventory investment over time.

• There is a six-step dollar control process, which should be followed sequentially.

• If a sales forecast is too low, a firm may run out of items because it does not plan to have enough merchandise during a selling season. Planned purchases will also be too low.

Merchandise Forecasting and Budgeting: Dollar Control


Figure 16-2: Merchandise Forecasting and Budgeting Process: Dollar Control


Table 16-7: Handy Hardware Store – Sales Forecast Using Product Control Units


Table 16-8: Handy Hardware Store – Sales by Month


Table 16-9: Handy Hardware Store – Forecast by Month


Figure 16-3: A Checklist to Reduce Inventory Shortages


Figure 16-4: Physical Inventory Systems Made Simpler


Figure 16-5: How Does a UPC-Based Scanner System Work?

When a scanner is passed over an item with a UPC symbol, that symbol is read by a low-energy laser. The UPC symbol consists of a series of vertical lines, with numbers below them. Each product has its own unique identification code, and the price is not in the symbol.


Figure 16-6a: How Stockouts May Occur


Figure 16-7: Economic Order Quantity


All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in

any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United

States of America.

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