Retail inventory concepts and calculations

Presented by: Sanghamitra Kalita CHE13MM14

Retail inventory control systems

It is an accounting procedure for estimating the value of a stores merchandise and maintenance of stock levels in relation to changing customer demands.

It helps the buyer to keep track of the amount of inventory in the store Gives inventory information while calculating how much money is available for purchasing additional merchandise

 Helps to provide information needed to take markdowns by identifying slow selling merchandise. Best selling products can be identified so that reorders can be placed to increase total sales. Merchandise shrinkage can be identified

There are 2 types of inventory control systems: Perpetual Periodic

Retail Inventory control system

perpetual

periodic

manual

computerized

manual

Perpetual control system

It is used to record business transactions such as sales , purchases, returns and transfers continuously Stock levels can be calculated at any point of time. Stores using perpetual control systems do not need to take actual count of their stock There are 2 types of perpetual control systems: Manual Computerized

Manual: Maintaining perpetual inventory by manually recording transactions on inventory control forms. They are updated as transactions occur on a daily or weekly basis They are slow

The data could be incorrect sometimes as it is entered manually

Computerized Merchandise information is automatically collected and processed for every transaction occurring at point of sale Provides up to date sales information and inventory data Has more speed, accuracy and efficiency of recordkeeping This system requires that each item be coded by UPC(universal product code) The code is read by a scanner and the information is updated in the inventory record

Periodic control system

They are used by retailers taking physical inventory on regular basis Involves actual counting and recording of information on merchandise at hand at a specified time. It is done to prepare a firms financial statements and comparing physical inventory records with store record to analyze the shrinkage of the stock. Before taking physical inventory merchandise needs to be grouped by categories. The inventory record sheet should have product information like product description, quantity, price, style, color etc.

Retail inventory concepts

1. Book inventory or perpetual inventory: A running total and record of the retail value of merchandise in the store including all movement of merchandise in and out of the store 2. Overage: retail dollar difference between the book inventory (numerical/ statistical count) and physical inventory indicates that there is more merchandise on hand than the book indicates

3. Physical inventory: The retail value of all goods physically counted in the store at a given point of time 4. Shortage: Retail dollar difference between the book inventory (numerical/ statistical count) and physical inventory indicates that there is more merchandise on hand than is actually fund when physical inventory count is completed 5. Retail inventory method: An accounting method used by retailers that assesses the retail value of merchandise in stock and allows to determine the cost value.

Calculations:
Book inventory: STEP 1: determine the opening amount of inventory at hand. The physical inventory count completed at the beginning and end of each accounting period acts as opening book inventory. Formula: Book inventory at retail = Opening physical inventory + Additional(in retail value) - deductions(in retail value) Book inventory at cost = Book inventory at retail X (100%Markup%)

To Calculate the closing book inventory at retail for the following: Opening physical inventory Net Sales Net Purchases Markdowns Markdown Cancellations $47,200 $43,000 $48,800 $5,500 $780

Employee Discounts

$270

STEP 1. Additions to Retail Value = Net Purchases + Markdown Cancellations = 48, 800 + 780 = 49,580 STEP 2. Deductions to Retail Value = Net Sales + Markdowns + Employee Discounts = 43,000 + 5, 500 + 270 = 48,770 STEP 3. Book Inventory at Retail = Opening Physical Inventory + Additions Deductions = 47200 + 49, 580 48, 770 = 48,010 Hence, Book Inventory at Retail = $ 48,010

To Calculate the closing book inventory at cost for the following:

The physical count of inventory on July 31st in a store yielded an inventory value of $27,000, what was the book inventory at retail on January 31 given the following figures for the period:

Gross Purchases Net Sales Markdowns

$47,200 $33,000 $5,500

Return to vendor
Markdown Cancellations Employee Discounts Freight

$2,000
$780 $270 $ 300

The markup percentage is 40% and the cost of new purchases is $32,000.

STEP 1. convert the opening book inventory from retail to cost: Opening Book Inventory at Cost = Retail$ * Cost Complement Cost Complement = 100% - MU% Opening Book Inventory at Cost = $27,000 * (100% - 40%) = $27,000 * 0.60 = $16,200

STEP 2. Calculate the cost of the total amount of merchandise handled and find the cumulative markup achieved: Cost of Merchandise Handled = Opening Inventory at Cost + New Purchases at Cost + Freight = $16,200 + $32,000 + $300 = $48,500

STEP 3. Markup$ = Total Merchandise Handled at Retail Total Merchandise Handled at Cost = [$ 47,200(Gross Purchases) + $( 47200-2000) RTV] - $ 48,500 = [$ 47,200(Gross Purchases) + $45200 RTV] - $ 48,500 = $43,900 Markup% = Markup$ / Total Merchandise Handled at Retail$ = $43,900 / $92,400 = 0.4751X100 =47.51%
STEP 4. convert the closing book inventory from retail to cost.

From the previous problem, we know that the closing book inventory at retail is given at $ 48,010. Closing Book Inventory at Cost = Retail$ * Cost Complement (100% - MU%) = $ 48,010 * (100% - 47.51%) = $ 48,010 * 52.49 = $25,200.449

Shortages: After physical inventory count is completed, book inventory is adjusted to agree with physical count. Shortages can be caused by errors in recording markdowns , returns to vendor, transfers in and out, merchandise breakage and theft and human error Formula: Shortage( overage)= closing book inventory at Retail closing physical inventory at retail Shortage( overage) % = shortage(overgae) $ Net sales

To Calculate the shortage or overage for the following: Opening physical inventory Net Sales Net Purchases Markdowns Markdown Cancellations $47,200 $43,000 $48,800 $5,500 $780

Employee Discounts
Physical Inventory at the End of accounting period

$270
$49,000

STEP 1. Calculate the book inventory: Additions to Retail Value = Net Purchases + Markdown Cancellations = 48, 800 + 780 = 49,580 Deductions to Retail Value = Net Sales + Markdowns + Employee Discounts = 43,000 + 5, 500 + 270 = 48,770

Book Inventory at Retail = Opening Physical Inventory + Additions Deductions = 47200 + 49, 580 48, 770 = 48,010 STEP 2. Overage (Shortage) = Closing Book Inventory at Retail Physical Inventory at Retail = 48,010 $49,000 = -990 Hence, Overage = -$990

CONCLUSION: Since the result is a negative number indicating that the physical inventory is actually larger than what the books had stated, it is an overage.

It would have been a shortage if the physical inventory was less than what the book inventory states.

Calculating Shortage & Overage Percentage

Problem: The merchandising plan for the period ending April 30th shows net sales figure of $245,000 and a planned shortage of 1.3%. Calculate the planned shortage dollars. We know, shortage %= shortage $ net sales $ And , Shortage $= net sales$ X shortage % Therefore, Shortage $= $245,000 X 1.3% = $ 3,185

Cumulative mark up dollars and percentage for total merchandise: cumulative markup $ = total merchandise handled at retail total merchandise handled at cost cumulative markup % = cumulative markup $ total merchandise handled at retail Gross cost of merchandise sold: Gross cost of merchandise sold= merchandise handled at cost (opening inventory + new purchases + freight) closing inventory Gross margin dollars and percentage: Gross margin $= net sales- total cost of merchandise sold Gross margin %= gross margin $ Net sales

Maintained markup dollars and percentage: Maintained markup $=Net sales total cost of merchandise sold Gross margin %= gross margin $ net sales Total cost of merchandise sold: Total cost of merchandise sold= gross cost of merchandise sold cash discounts + alterations/workroom cost Total merchandise handled at cost: Merchandise handled at cost= beginning inventory + net merchandise purchases + freight Total merchandise handled at retail: Merchandise handled at retail= beginning inventory + net merchandise purchased (not including freight) + additional markup

Thank you