Why is inventory control important?

• To meet customer demand

• There is a cost to inventory, real and opportunity; significant investment
• Largest current asset in the financial statements of a retailer

The Retail Method of Inventory?

• A system of merchandise accounting that permits the retailer to determine the retail
value of the stock on hand at frequent points in time without the need for a physical
inventory count
• This method is needed to provide a retailer with information that supports their goal of
meeting customer demand in a cost-efficient manner outside of regular reporting
intervals (quarterly)

How is the Retail Method Implemented?

• First, a physical inventory count must be completed for a particular department at retail
(retail value of the goods counted is used as the opening book inventory figure)
• Then the cumulative markup percentage on the total merchandise handled (opening
inventory + total purchases) must be determined
• Finally, the cost value of the closing inventory from retail must be derived using the
CMU%
*****Method requires the maintenance of book inventory at retail

What is book inventory?

• The amount of inventory in dollars that has been determined from accounting records,
as opposed to an actual inventory count
• In between annual/semi annual physical inventory accounts there is a lot of activity:
• Goods are sold to customers
• Merchandise is purchased and received from resources
• Customers return goods
• Markdowns
• Goods transferred to other departments
• Goods transferred to other stores
• Merchandise returned to vendors
• With each activity, there is accompanying “paperwork” (typically all handled
electronically)
• Accounting system records each transaction and increases or decreases the book stock
accordingly by the retail value of the goods sold/transferred

How is book inventory at retail calculated?

1. Physical count to determine closing physical stock on hand
2. Closing physical stock = opening retail book inventory
3. Add all new purchases at retail to determine total merchandise handled at retail
4. Subtract all retail deductions (e.g. net sales, markdowns) from the retail total merchandise
handled to find the closing book inventory at retail