Chapter 16

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Financial
Merchandise
Management
RETAIL
MANAGEMENT:
A STRATEGIC
APPROACH
11th Edition
BERMAN
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EVANS
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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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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 outof-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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Table 16-1: Handy Hardware Store Profit-and-Loss
Statement
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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 is derived during full merchandise
count.
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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.
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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
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Table 16-2: Handy Hardware Store
Perpetual Inventory System
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Figure 16-1:
Applying
FIFO and
LIFO
Inventory
Methods
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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
Calculating the cost complement
2. Calculating deductions from retail value
3. Converting retail inventory value to cost
1.
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Table 16-3: Handy Hardware Store — Calculating
Merchandise Available for Sale
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Table 16-4: Handy Hardware Store – Computing
Ending Retail Book Value
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Table 16-5: Handy Hardware Store – Stock
Shortages and Adjusting Retail Book Value
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Table 16-6: Handy Hardware Store –
Profit-and-Loss Statement
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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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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.
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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
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Table 16-8: Handy Hardware Store – Sales by Month
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Table 16-9: Handy Hardware Store – Forecast by Month
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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?
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.
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Figure 16-6a:
How
Stockouts
May Occur
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Figure 16-7: Economic Order Quantity
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All rights reserved. No part of this publication may be
reproduced, stored in a retrieval system, or transmitted, in
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photocopying, recording, or otherwise, without the prior
written permission of the publisher. Printed in the United
States of America.
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