16.financial Merchandise Management

Retail Management: A Strategic
Approach
Thirteenth Edition
Chapter 16
Financial
Merchandise
Management
Copyright 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved.
Learning Objectives
16.1 To describe the major aspects of financial merchandise
planning and management
16.2 To explain the cost and retail methods of accounting
16.3 To study the merchandise forecasting and budgeting
process
16.4 To examine alternative methods of inventory unit control
16.5 To integrate dollar and unit merchandising control
concepts
Financial Merchandise
Management (1 of 2)
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 investment in merchandise over a stated period.
Unit control relates to the quantities of goods a retailer
handles during a stated period.
Benefits of Financial Merchandise
Plans (1 of 2)
The value and amount of inventory in each department
and/or store unit during a given period are delineated.
Open to buy, the amount of merchandise a buyer can
purchase during a given period can be calculated.
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.
Benefits of Financial Merchandise
Plans (2 of 2)
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.
Financial Merchandise
Management (2 of 2)
Four aspects covered:
Methods of accounting (inventory valuation)
Merchandise forecasting and budgeting
Unit control systems
Financial inventory control
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, January 1, 2016-June 30, 2016
Sales Blank $ 417,460
Less cost of goods sold: Blank Blank
Beginning inventory (at cost) $ 44,620 Blank
Purchase (at cost) 289,400 Blank
Transportation charges 2,600 Blank
Merchandise available for sale $ 336,620 Blank
Ending inventory (at cost) 90,500 Blank
Cost of goods sold Blank 246,120
Gross profit Blank $ 171,340
Less operating expenses: Blank Blank
Salaries $ 70,000 Blank
Advertising 25,000 Blank
Rental 16,000 Blank
Other 26,000 Blank
Total operating expenses Blank 137,000
Net profit before taxes Blank $34,340
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 is derived during full merchandise count.
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
Figure 16.1 Applying FIFO and LIFO
Inventory Methods to Handy Hardware,
January 1, 2016December 31, 2016
Advantages of Cost-Based Inventory
Systems
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 more easily
computed without the need for a physical inventory.
Frequent financial statements can be prepared.
Disadvantages of Cost-Based
Inventory Systems
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, July 1, 2016-December 31,
2016*
Net Monthly Monthly End-of-Month

Beginning-of-Month Purchases Sales (at inventory (at
Date Inventory (at cost) + (at cost) cost) = cost)
7/1/16 $ 90,500 + $ 40,000 $ 62,400 = $ 68,100
8/1/16 68,100 + 28,000 38,400 = 57,700
9/1/16 57,700 + 27,600 28,800 = 56,500
10/1/16 56,500 + 44,000 28,800 = 71,700
11/1/16 71,700 + 50,400 40,800 = 81,300
12/1/16 81,300 + 15,900 61,200 = 36,000
Bla Bla
Blank Blank Total $ 205,900 nk $260,400 nk (as of 12/31/16)
* Transportation charges are not included in computing inventory value in this table
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. This
is called the cost complement.
The cost complement is also used in open-to-buy
calculations
Advantages of the Retail Method (1 of 2)
Costs do not have to be decoded when conducting a
physical inventory
Profit and loss statements can be prepared based on
retail inventory values which are then converted into costs
The retail method is acceptable for insurance claims
Determining Ending Inventory Value
Calculating the cost complement
Calculating deductions from retail value
Converting retail inventory value to cost
Table 16.3 Handy Hardware Store, Calculating
Merchandise Available for Sale at Cost and at
Retail, July 1, 2016-December 31, 2016
Blank 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 for sale $ 299,892 $ 496,126
Calculation of Cost Complement
Total Cost Valuation
Cost Complement
Total Retail Valuation
$299,286

$496,126
0.6045
On average, 60.45 cents of every sales dollar was used to pay

for merchandise
Table 16.4 Handy Hardware Store, Computing
Ending Retail Book Value, as of December 31,
2016
Merchandise available for sale (at retail) Blank $ 496,126

Less deductions: Blank Blank
Sales $ 422,540 Blank
Markdowns 11,634 Blank
Employee discounts 2,400 Blank
Total deductions Blank 436,574
Ending retail book value of inventory Blank $ 59,552
Table 16.5 Handy Hardware Store, Computing
Stock Shortages and Adjusting Retail Book
Value, as of December 31, 2016
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
Convert Retail Inventory Value to
Cost Basis
Ending Inventory value at retail (net of stock shortages at
retail value based on physical inventory) Cost Complement
($59,552 stock shortages of $3,083) 0.6045 = $34,136
Shortage Calculation
Shortages can be due to:
Employee theft
Customer theft
Accounting errors
Not reducing inventory valuations due to markdowns,
employee discounts, etc.
Table 16.6 Handy Hardware Store Profit-and-
Loss Statement, July 1, 2016-December 31, 2016
Sales blank $ 422,540
Less cost of goods sold: blank blank
Total merchandise available for sale (at cost) $ 299,892 blank
Adjusted ending inventory (at cost)* 34,136 blank
Cost of goods sold blank 265,756
Gross profit blank $ 156,784
Less operating expenses: blank blank
Salaries $ 70,000 blank
Advertising 25,000 blank
Rental 16,000 blank
Other 28,000 blank
Total operating expenses blank 139,000
Net profit before taxes blank $ 17,784
Advantages of the Retail Method (2 of 2)
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 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
Merchandise transfers to other stores
Merchandise returns
Sales
--Cost complement is an average based on the total cost of merchandise
available for sale and total retail value.
Merchandise Forecasting and
Budgeting: Dollar Control
Dollar control entails planning and monitoring a firms
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.
Figure 16.2 Merchandise Forecasting
and Budgeting Process: Dollar Control
Table16.7 Handy Hardware Store: A Simple
Sales Forecast Using Product Control Units
Projected
Product Control Units Actual Sales 2016 Growth/Decline (%) Sales Forecast 2017
Lawn mowers/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 +4.9a $ 881,080
a There is a small rounding error
Table 16.8 Handy Hardware Store,
2016 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 blank
Average monthly sales $ 70,000 blank
Average monthly index blank 100
Table 16.9 Handy Hardware Store,
2017 Sales Forecast by Month
Month Actual Sales 2016 Monthly Sales Index Monthly Sales Forecast for 2017a
January $ 46,800 67 $ 73,423 0.67 = $ 49,193
February 40,864 58 73,423 0.58 = 42,585
March 48,000 69 73,423 0.69 = 50,662
April 65,600 94 73,423 0.94 = 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 0.90 = 66,081
September 46,904 67 73,423 0.67 = 49,193
October 46,800 67 73,423 0.67 = 49,193
November 66,884 96 73,423 0.96 = 70,486
December 94,792 135 73,423 1.35 = 99,121
Total sales $ 840,000 blank Total sales forecast $881,080b
Average monthly sales $ 70,000 blank Average monthly forecast $ 73,423
a Monthly sales forecast = average monthly forecast (Monthly index/100). In this equation, the monthly
index is computed as a fraction of 1.00 rather than 100.
b There is a small rounding error
Inventory-Level Planning (1 of 2)
Four techniques:
Basic stock method
Basic stock (at retail) = Average monthly stock at retail Average
monthly sales
Beginning-of-month planned inventory level (at retail) = Planned
monthly sales + Basic stock
Percentage variation method
Beginning-of-month planned inventory level (at retail)
Planned average monthly stock at retail
1 Estimated monthly sales
1
2 Estimated average monthly sales
Inventory-Level Planning (2 of 2)
Weeks supply method
Beginning-of-month weekly sales planned inventory level (at
retail) = Average estimated weekly sales Number of weeks
to be stocked
Stock-to-sales method
Planning Purchases: Open to Buy
Planned purchases (at retail) = Planned sales for the
month + Planned reductions for the month + Planned
end of month inventory Beginning of month stock
Open to buy (at retail) = Planned purchases for month
less purchase commitments for that month
Open to buy (at cost) = Open to buy at retail times cost
complement
Figure 16.3 A Checklist to Reduce
Inventory Shortages
Figure 16.4 (Time Consuming)
Physical Inventory Systems
Perpetual Inventory Unit Control
Systems
Running total of number of units, three forms
Point-of-sale (POS) & optical scanners/barcoding)
Manual systems, employee examination and
documentation
Merchandise tagging system
Networked, computerized POS systems
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 16.6 When to Reorder
(How Stock outs May Occur)
Figure 16.7 How Much to Reorder
(EOQ)
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Retail Management: A Strategic

Net Monthly Monthly End-of-Month

Blank At Cost At Retail

On average, 60.45 cents of every sales dollar was used to pay

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

Ending retail book value of inventory $ 59,552

Lawn mowers/snow blowers $ 200,000 + 10.0 $ 220,000

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