1. 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

2. 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

3. 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

4. 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

5. 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

6. 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

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

8. 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

9. 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

10. 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

11. 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

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

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

14. 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

15. 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

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

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

18. 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

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

20. 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

21. 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

22. 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

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

24. Table 16-7: Handy Hardware Store – Sales Forecast Using Product Control Units
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25. Table 16-8: Handy Hardware Store – Sales by Month
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26. Table 16-9: Handy Hardware Store – Forecast by Month
Retail Mgt. 11e (c) 2010 Pearson Education, Inc. publishing as Prentice Hall

27. Figure 16-3: A Checklist to Reduce Inventory Shortages
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28. Figure 16-4: Physical Inventory Systems Made Simpler
Retail Mgt. 11e (c) 2010 Pearson Education, Inc. publishing as Prentice Hall

29. 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

30. Figure 16-6a: How Stockouts May Occur
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31. Figure 16-7: Economic Order Quantity
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