What is Merchandise Inventory?
Merchandise inventory is all of the goods that a distributor, wholesaler, or retailer acquires and intends to sell at retail. Wholesale marketplaces and retailers are typically the only businesses that have merchandise inventory at any given time. This is because merchandise inventory is essentially just the goods that are intended to be resold at a higher price than the price they were acquired. The sale can be intended for consumers or commercial.
Merchandise inventory is different from manufacturing inventory, MRO inventory, or raw materials inventory. Most companies that handle merchandise inventory won’t be handling other types of inventory at the same time.
A merchandising business model is mostly different in the way that the books are kept. If you run a merchandising business, you’ll show inventory as assets with procurement costs such as shipping offsetting or adding to your inventory cost.
One way that may be easier to think about it is to look at inventory in the cost of goods sold model. This comes in contrast to a manufacturing business that creates and sells products that they manufacture.
What Does Merchandise Inventory Include?
All goods intended for resale, including those that are in transit from suppliers, in company storage facilities, on displays throughout retail locations, and those that are on consignment at other retail locations.
If you’re still unsure of what it includes, think of Walmart. Everything they own and intend to sell is considered merchandise inventory that can be used towards their company assets.
Merchandise on Hand
Merchandise on hand refers to all of the acquired goods that are available for sale at any time. These do not include inventory that is in transit. If merchandise is going to be counted as on hand, it will need to be able to be sold on demand. When calculating assets, the merchandise on hand will likely be smaller than your total merchandise inventory because it discludes the merchandise that is in transit.
Merchandise on Hand as an Asset
When you’re reporting assets, merchandise inventory is part of your companies assets. Among your calculations, you’ll have two main types of assets. These are current assets and noncurrent assets.
Current assets include the assets that you have on hand that will easily convert to cash. These would include inventory or merchandise inventory and other similar items that are circulated within the fiscal year. These assets are often more attractive in the short term because they can provide a more immediate economic value. Merchandise inventory is one of the best ways to see and understand current or liquid assets.
Noncurrent assets include all of your companies long-term investments and intangible assets such as intellectual or technological property. It additionally includes physical property and equipment that your company owns.
Accounting Merchandise Inventory
On an account ledger, merchandise inventory will take up a place on your balance sheet and reflect the total amount paid for products that are yet to be sold. Many accountants and executives would consider this to “merchandise inventory” to work as a holding account for items that will later be converted to credits instead of debits.
Merchandise inventory will be reflected on your balance sheet, but it is also reflected on your COGS or cost of goods sold.
On Your Income Statement
While merchandise inventory isn’t directly on your income statement, it is indirectly reported on that sheet through the COGS or cost of goods sold. The merchandise inventory will show as an asset on your balance, and the cost of merchandise inventory that has been sold during an accounting cycle is reported on the income statement in which the sale is made. Any merchandise inventory that is not sold in a given accounting cycle is registered instead as a current asset.
Merchandise Inventory Turnover
Tracking merchandise inventory turnover is essential to understanding how your company handles merchandise and whether you have a high or low inventory turn. All companies should be looking to maintain a high merchandise inventory turnover. Without new inventory continually coming in and going out (high turnover), your business won’t be making any money.
Money that’s tied up in inventory that isn’t selling or moving on through your warehouse will eventually become a liability. Sometimes this can’t be helped, but other times it’s important to ensure that you’re doing everything you can to keep the money flowing and your company in the green. A successful warehouse with a tuned-in supply chain will limit the amount of inventory that isn’t being quickly sold.
How to Calculate Merchandise Inventory
As long as you have access to accurate and timely data from your companies revenue statements, calculating merchandise inventory isn’t too difficult. You’ll need to know the beginning inventory number, how much inventory was purchased, and the COGS.
With these three figures, you’ll be able to calculate your merchandise inventory.
For example, take your beginning inventory + purchased inventory – COGS = merchandise inventory.
The resulting number or your merchandise inventory is the amount of money that your business has tied up in inventory going into the next accounting cycle. If this number isn’t carefully kept up to date, your business accounts won’t be able to accurately reflect how much money is stored in inventory.
Merchandise Inventory: How To Be Effective
As you know or may have discovered, merchandise inventory almost always refers to retail-oriented businesses. While this is true, it’s not uncommon in our day and age for merchandise inventory companies to be built online. Because we’re a primarily warehouse-oriented company, we’re going to focus on the ways that online merchandise inventory businesses can be more effective.
Maximize Profit with First-In, First-Out (FIFO)
When using the FIFO method, you’ll seek to sell the items that you’ve acquired first before items that have been acquired later. For a business that sells perishable goods, this model will help to ensure that they maintain high-quality shipments. This model is also effective if your business sells any seasonal products.
Additionally, when calculating the value of the remaining stock, you’ll base it on the cost of goods sold from the product that you acquired first. This stands even if the price of that same product rises or lowers when you’re re-ordering more inventory.
Last-In, First-Out (LIFO)
This method may seem contradictory to the first, but generally, the same mindset applies. You’ll seek to sell the inventory that you acquired last, first. In this way, you’ll adjust your accounting of the inventory asset you have to reflect the price of the inventory that you acquired first.
This model is one of the most complex systems and requires a good bit of manipulation on your income statement and inventory account. Most non-U.S. businesses won’t be able to use this model because of it being so difficult on the account end.
This system works great for companies that are based in the U.S. and sell non-perishable, raw materials such as gas, metal, or chemicals.
Just-in-time is used differently from the previous two methods in that inventory is purchased more as needed instead of keeping it in stock. When sales rise, so do new inventory orders to fulfill all the sales. This method reduces risk, overhead cost of storage, and waste from unused inventory.
One such company that has adopted this philosophy and seen it through to increase profits and decrease waste is Toyota. The company works to calculate sales based on how many vehicles have been sold and other market trends. In this way, even in the worst years or a drop in the economy, they can still be profitable. This system made them the most profitable and valuable vehicle manufacturer for many years.
You’ll find that this method works best for retailers who have mastered accurate forecasting, and who want to reduce holding costs.
The ABC analysis approach helps you prioritize the sale of different products based on the cost of goods sold. You’ll just need to place your merchandise inventory into three groups.
- A – High-value, low sales: this group is meant for the merchandise that makes your company good money but costs a significant amount to procure. You won’t want to keep these items in stock for too long because of the financial strain that it could put your income statement in.
- B – middle-value, average sales: Falling right in the middle is letter B. These goods are sold on a more predictable base but aren’t the most frequently sold.
- C – low-value, high sales: These merchandise items are the ones that you can’t keep on the shelf. They help to boost your balance sheet but also don’t provide a large source of income because of a lower selling point. You shouldn’t need to market these items too much or give them a lot of attention.
After you’ve established these groups, you’ll need to set your priorities. Make merchandise inventory group A the most important. What can you do to sell more of these items to help boost your financial statements and put your company in the black?
C products are the ones that will be self-sustaining. Keep an eye on them, so you have a good amount of stock, but don’t spend too much time worrying about them.
B products are products you’ll want to keep your eye on. Be wary of letting them move into the category of Obsolete Inventory. It’s best for your business if you can give them a push to sell more frequently or just to maintain consistent sales so that you can predict inventory changes.
Using Inventory Management Tools = More Profits
Another way that a warehouse merchandising inventory business can become more profitable is by using inventory management software. Some of the largest e-commerce companies have been able to build their business on the back of a great inventory management system.
All warehouses and e-commerce businesses could benefit from using an inventory management system. We have the perfect system for you that is specifically set up for your merchandise inventory needs. TopShelf by Scout is an innovative inventory solution.
The system easily integrates with other accounting, sales, and business tools that you’re already using. Contact us today for a quote based on the size of your business and the needs you might have. We also offer free demos that allow you to see the product in action. We can’t wait to hear from you!