Financial Merchandise Management Chapter 16 Financial Merchandise Management RETAIL MANAGEMENT: A STRATEGIC APPROACH 11th Edition BERMAN EVANS Retail Mgt. 11e (c) 2010 Pearson Education, Inc. publishing as Prentice Hall

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

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

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

Benefits of Financial Merchandise Plans (cont.) 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. Retail Mgt. 11e (c) 2010 Pearson Education, Inc. publishing as Prentice Hall

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

Table 16-1: Handy Hardware Store Profit-and-Loss Statement Retail Mgt. 11e (c) 2010 Pearson Education, Inc. publishing as Prentice Hall

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

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

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

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

Table 16-2: Handy Hardware Store Perpetual Inventory System Retail Mgt. 11e (c) 2010 Pearson Education, Inc. publishing as Prentice Hall

Figure 16-1: Applying FIFO and LIFO Inventory Methods Retail Mgt. 11e (c) 2010 Pearson Education, Inc. publishing as Prentice Hall

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

Determining Ending Inventory Value Calculating the cost complement Calculating deductions from retail value Converting retail inventory value to cost Retail Mgt. 11e (c) 2010 Pearson Education, Inc. publishing as Prentice Hall

Table 16-3: Handy Hardware Store — Calculating Merchandise Available for Sale Retail Mgt. 11e (c) 2010 Pearson Education, Inc. publishing as Prentice Hall

Table 16-4: Handy Hardware Store – Computing Ending Retail Book Value Retail Mgt. 11e (c) 2010 Pearson Education, Inc. publishing as Prentice Hall

Table 16-5: Handy Hardware Store – Stock Shortages and Adjusting Retail Book Value Retail Mgt. 11e (c) 2010 Pearson Education, Inc. publishing as Prentice Hall

Table 16-6: Handy Hardware Store – Profit-and-Loss Statement Retail Mgt. 11e (c) 2010 Pearson Education, Inc. publishing as Prentice Hall

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

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

Merchandise Forecasting and Budgeting: Dollar Control 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. Retail Mgt. 11e (c) 2010 Pearson Education, Inc. publishing as Prentice Hall

Figure 16-2: Merchandise Forecasting and Budgeting Process: Dollar Control Retail Mgt. 11e (c) 2010 Pearson Education, Inc. publishing as Prentice Hall

Table 16-7: Handy Hardware Store – Sales Forecast Using Product Control Units Retail Mgt. 11e (c) 2010 Pearson Education, Inc. publishing as Prentice Hall

Table 16-8: Handy Hardware Store – Sales by Month Retail Mgt. 11e (c) 2010 Pearson Education, Inc. publishing as Prentice Hall

Table 16-9: Handy Hardware Store – Forecast by Month Retail Mgt. 11e (c) 2010 Pearson Education, Inc. publishing as Prentice Hall

Figure 16-3: A Checklist to Reduce Inventory Shortages Retail Mgt. 11e (c) 2010 Pearson Education, Inc. publishing as Prentice Hall

Figure 16-4: Physical Inventory Systems Made Simpler Retail Mgt. 11e (c) 2010 Pearson Education, Inc. publishing as Prentice Hall

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

Figure 16-6a: How Stockouts May Occur Retail Mgt. 11e (c) 2010 Pearson Education, Inc. publishing as Prentice Hall

Figure 16-7: Economic Order Quantity Retail Mgt. 11e (c) 2010 Pearson Education, Inc. publishing as Prentice Hall

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