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Retail Management: A Strategic Approach

Thirteenth Edition

Chapter 16

Financial Merchandise Management

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Learning Objectives

16.1 To describe the major aspects of financial merchandise planning and management

16.2 To explain the cost and retail methods of accounting

16.3 To study the merchandise forecasting and budgeting process

16.4 To examine alternative methods of inventory unit control

16.5 To integrate dollar and unit merchandising control concepts

Financial Merchandise Management (1 of 2)

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.

Benefits of Financial Merchandise Plans (1 of 2)

The value and amount of inventory in each department and/or store unit during a given period are delineated.

Open to buy, the amount of merchandise a buyer can purchase during a given period can be calculated.

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.

Benefits of Financial Merchandise Plans (2 of 2)

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.

Financial Merchandise Management (2 of 2)

Four aspects covered:

Methods of accounting (inventory valuation)

Merchandise forecasting and budgeting

Unit control systems

Financial inventory control

Retailers have different data needs than manufacturers.

Assortments are larger (sorting, combining and breaking bulk of retail role in the channel).

Costs cannot be printed on cartons unless coded.

Stock shortages are higher.

Sales are more frequent.

Monthly, not quarterly, profit data are required.

The hypothetical Handy Hardware Store is used throughout the chapter to illustrate the concepts.

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 inventory accounting systems can be complex because they entail a great deal of data.

Two inventory accounting systems are available to a retailer:

The cost accounting system values merchandise at cost plus inbound transportation charges.

The retail accounting system values merchandise at current retail prices.

Table 16.1 Handy Hardware Store Profit-and-Loss Statement, January 1, 2016-June 30, 2016

Sales	Blank	$ 417,460
Less cost of goods sold:	Blank	Blank
Beginning inventory (at cost)	$ 44,620	Blank
Purchase (at cost)	289,400	Blank
Transportation charges	2,600	Blank
Merchandise available for sale	$ 336,620	Blank
Ending inventory (at cost)	90,500	Blank
Cost of goods sold	Blank	246,120
Gross profit	Blank	$ 171,340
Less operating expenses:	Blank	Blank
Salaries	$ 70,000	Blank
Advertising	25,000	Blank
Rental	16,000	Blank
Other	26,000	Blank
Total operating expenses	Blank	137,000
Net profit before taxes	Blank	$34,340

A typical retailer’s dollar control system must provide such data as the sales and purchases made by that firm during a budget period, the value of beginning and ending inventory, markups and markdowns, and merchandise shortages. Table 16.1 shows a profit-and-loss statement for Handy Hardware Store. Sales are the total receipts for the specified time period.

Beginning inventory is computed by counting the merchandise in stock on the start date of the period, recorded at cost. Purchases (at cost) and transportation charges are derived by adding the invoice slips for all merchandise bought by the store during the time period.

The cost of merchandise available for sale is the sum of beginning inventory, purchases, and transportation charges. The cost of goods sold equals the cost of merchandise available for sale minus the cost value of ending inventory. Sales less cost of goods sold yields gross profit. Net profit is gross profit minus retail operating expenses.

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.

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

The Cost Method: with the cost method of accounting, the cost to the retailer of each item is recorded. As a physical inventory is done, item costs must be learned, the quantity of every item in stock counted, and total inventory value at cost calculated.

Some retailers use alphabetical codes so that items can be marked in terms of cost.

The cost method can be used with physical or book inventories.

This occurs with a physical inventory system.

Ending inventory, recorded at cost, is measured by counting the merchandise in stock at the close of a selling period.

All purchase invoices for the period are added up. Gross profits are computed. Gross profits cannot be determined until ending inventory is valued, usually only once or twice per year. Further, inventory shortages are not uncovered or assessed. What the ending inventory level should be is not computed.

A book (perpetual) inventory system avoids the problem of infrequent financial analysis by keeping a running total of the value of all inventory on hand at cost. In addition, shortages can be uncovered.

A book inventory is kept by adding purchases to existing inventory value and then subtracting sales to arrive at the new current inventory value (all at cost). Table 16-2 shows an example of this.

The FIFO (first-in-first-out) method assumes old merchandise is sold first, while newer items remain in inventory. The LIFO (last-in-first-out) method assumes new merchandise is sold first, while older stock remains in inventory.

FIFO matches inventory value with the current cost structure, while LIFO matches current sales with the current cost structure.

In Figure 16-1 (next slide), the FIFO and LIFO methods of inventory valuation are illustrated for Handy Hardware’s snow blowers.

Figure 16.1 Applying FIFO and LIFO Inventory Methods to Handy Hardware, January 1, 2016–December 31, 2016

Advantages of Cost-Based Inventory Systems

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 more easily computed without the need for a physical inventory.

Frequent financial statements can be prepared.

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

The disadvantages of cost-based inventory systems include:

Costs must be assigned to each item in stock. It is therefore most useful to firms with low inventory turnover, limited assortments, and high average prices.

Inventory is not adjusted to reflect style changes, end-of-season markdowns, or sudden surges of demand (which may raise prices). This may affect insurance coverage or claims.

Table 16.2 Handy Hardware Store Perpetual Inventory System, July 1, 2016-December 31, 2016*

Date	Beginning-of-Month Inventory (at cost)	+	Net Monthly Purchases (at cost)	−	Monthly Sales (at cost)	=	End-of-Month inventory (at cost)
7/1/16	$ 90,500	+	$ 40,000	−	$ 62,400	=	$ 68,100
8/1/16	68,100	+	28,000	−	38,400	=	57,700
9/1/16	57,700	+	27,600	−	28,800	=	56,500
10/1/16	56,500	+	44,000	−	28,800	=	71,700
11/1/16	71,700	+	50,400	−	40,800	=	81,300
12/1/16	81,300	+	15,900	−	61,200	=	36,000
Blank	Blank	Total	$ 205,900	Blank	$260,400	Blank	(as of 12/31/16)

* Transportation charges are not included in computing inventory value in this table

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. This is called the cost complement.

The cost complement is also used in open-to-buy calculations

Advantages of the Retail Method (1 of 2)

Costs do not have to be decoded when conducting a physical inventory

Profit and loss statements can be prepared based on retail inventory values which are then converted into costs

The retail method is acceptable for insurance claims

With the retail method of accounting, closing inventory value is determined by calculating the average relationship between the cost and retail values of merchandise available for sale during a period. The retail method of inventory valuation overcomes the disadvantages of the cost method, but requires detailed records. It is more complex because ending inventory is first valued in retail dollars and then converted to compute gross margin (gross profit).

Determining Ending Inventory Value

Calculating the cost complement

Calculating deductions from retail value

Converting retail inventory value to cost

PLEASE NOTE THESE NOTES ARE INSERTED AS RELEVANT IN THE NEXT 3 SLIDES.

There are three basic steps to determine in computing ending inventory value by the retail method.

The cost complement is calculated by examining beginning inventory and net purchase amounts at both cost and retail levels.

Beginning inventory is valued.

Net purchases are determined.

Additional markups (only at retail value) are ascertained.

Transportation charges are the costs for shipping goods.

Table 16-3 shows the total merchandise available for sale at Handy Hardware. It allows the cost complement to be computed:

Cost complement = Total cost valuation

Total retail valuation

= $299,892 = 0.6045

$496,126

Deductions from retail value are reflected.

Besides sales, they include markdowns (e.g., special sales and end-of-season goods), employee discounts, and stock shortages (due to pilferage and unrecorded breakage).

Sales, markdowns, and discounts can be monitored through a book inventory, but stock shortages cannot be assessed until a physical inventory is completed.

Tables 16-4 and 16-5 illustrate how ending inventory is adjusted for sales, markdowns, employee discounts, and stock shortages.

Both stock shortages and stock overages can occur. Since a physical inventory is usually taken only once or twice a year, stock shortages or overages are often estimated monthly.

The retail book value of inventory is adjusted after a physical inventory is taken.

The adjusted ending retail book value of inventory must be converted to cost in order to determine gross profit.

Ending inventory (at cost) = Adjusted ending retail book value X Cost complement.

This computation does not yield the exact inventory cost. It shows the average relationship between cost and the retail selling price for all merchandise available for sale. The adjusted ending inventory at cost can be used to find gross profit. See Table 16-6.

Table 16.3 Handy Hardware Store, Calculating Merchandise Available for Sale at Cost and at Retail, July 1, 2016-December 31, 2016

Blank	At Cost	At Retail
Beginning inventory	$ 90,500	$ 139,200
Net purchases	205,900	340,526
Additional markups	―	16,400
Transportation charges	3,492	―
Total merchandise available for sale	$ 299,892	$ 496,126

The cost complement is calculated by examining beginning inventory and net purchase amounts at both cost and retail levels.

Beginning inventory is valued.

Net purchases are determined.

Additional markups (only at retail value) are ascertained.

Transportation charges are the costs for shipping goods.

Table 16.3 shows the total merchandise available for sale at Handy Hardware. It allows the cost complement to be computed:

Cost complement = Total cost valuation

Total retail valuation

= $299,892 = 0.6045

$496,126

Calculation of Cost Complement

On average, 60.45 cents of every sales dollar was used to pay for merchandise

It allows the cost complement to be computed:

Cost complement = Total cost valuation

Total retail valuation

= $299,892 = 0.6045

$496,126

Table 16.4 Handy Hardware Store, Computing Ending Retail Book Value, as of December 31, 2016

Merchandise available for sale (at retail)	Blank	$ 496,126
Less deductions:	Blank	Blank
Sales	$ 422,540	Blank
Markdowns	11,634	Blank
Employee discounts	2,400	Blank
Total deductions	Blank	436,574
Ending retail book value of inventory	Blank	$ 59,552

Deductions from retail value are reflected.

Besides sales, they include markdowns (e.g., special sales and end-of-season goods), employee discounts, and stock shortages (due to pilferage and unrecorded breakage).

Sales, markdowns, and discounts can be monitored through a book inventory, but stock shortages cannot be assessed until a physical inventory is completed.

Tables 16.4 and 16.5 illustrate how ending inventory is adjusted for sales, markdowns, employee discounts, and stock shortages.

Both stock shortages and stock overages can occur. Since a physical inventory is usually taken only once or twice a year, stock shortages or overages are often estimated monthly.

The retail book value of inventory is adjusted after a physical inventory is taken.

Table 16.5 Handy Hardware Store, Computing Stock Shortages and Adjusting Retail Book Value, as of December 31, 2016

Ending retail book value of inventory	$ 59,552
Physical inventory (at retail)	56,470
Stock shortages (at retail)	3,082
Adjusted ending retail book value of inventory	$ 56,470

Both stock shortages and stock overages can occur. Since a physical inventory is usually taken only once or twice a year, stock shortages or overages are often estimated monthly. The retail book value of inventory is adjusted after a physical inventory is taken.

Convert Retail Inventory Value to Cost Basis

Ending Inventory value at retail (net of stock shortages at retail value based on physical inventory) × Cost Complement

($59,552 − stock shortages of $3,083) × 0.6045 = $34,136

The adjusted ending retail book value of inventory must be converted to cost in order to determine gross profit.

Ending inventory (at cost) = Adjusted ending retail book value X Cost complement. This computation does not yield the exact inventory cost. It shows the average relationship between cost and the retail selling price for all merchandise available for sale. The adjusted ending inventory at cost can be used to find gross profit. See Table 16-6.

Shortage Calculation

Shortages can be due to:

Employee theft

Customer theft

Accounting errors

Not reducing inventory valuations due to markdowns, employee discounts, etc.

Table 16.6 Handy Hardware Store Profit-and-Loss Statement, July 1, 2016-December 31, 2016

Sales	blank	$ 422,540
Less cost of goods sold:	blank	blank
Total merchandise available for sale (at cost)	$ 299,892	blank
Adjusted ending inventory (at cost)*	34,136	blank
Cost of goods sold	blank	265,756
Gross profit	blank	$ 156,784
Less operating expenses:	blank	blank
Salaries	$ 70,000	blank
Advertising	25,000	blank
Rental	16,000	blank
Other	28,000	blank
Total operating expenses	blank	139,000
Net profit before taxes	blank	$ 17,784

The adjusted ending inventory at cost can be used to find gross profit. See Table 16.6.

Advantages of the Retail Method (2 of 2)

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.

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

Merchandise transfers to other stores

Merchandise returns

Sales

--Cost complement is an average based on the total cost of merchandise available for sale and total retail value.

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.

Figure 16.2 Merchandise Forecasting and Budgeting Process: Dollar Control

Figure 16.2 shows the six-step dollar control process: designating control units, sales forecasting, inventory-level planning, reduction planning, planning purchases, and planning profit margins. It should be followed sequentially.

Designating Control Units

Control units are the merchandise categories for which data are gathered.

The units must be narrow enough to isolate opportunities and problems with specific merchandise lines.

It is helpful to select control units consistent with other company and trade association data.

Control units may be based on departments, classifications within departments, price line classifications, and standard merchandise classifications.

To obtain more data than is available in departmental categories, classification merchandising can be used. It subdivides each specified department into further categories for related types of merchandise.

Price line classifications is a special form of classification merchandising whereby retail sales, inventories, and purchases are analyzed by price category.

The National Retail Federation devised a standard merchandise classification and annually publishes data by merchandising category. Progressive Grocer publishes data based on standard classifications for supermarkets.

All transactions must be recorded under the proper classification number.

Table16.7 Handy Hardware Store: A Simple Sales Forecast Using Product Control Units

Product Control Units	Actual Sales 2016	Projected Growth/Decline (%)	Sales Forecast 2017
Lawn mowers/snow blowers	$ 200,000	+ 10.0	$ 220,000
Paint and supplies	128,000	+3.0	131,840
Hardware supplies	108,000	+8.0	116,640
Plumbing supplies	88,000	−4.0	84,480
Power tools	88,000	+6.0	93,280
Garden supplies/chemicals	68,000	+4.0	70,720
Housewares	48,000	−6.0	45,120
Electrical supplies	40,000	+4.0	41,600
Ladders	36,000	+6.0	38,160
Hand tools	36,000	+9.0	39,240
Total year	$ 840,000	+4.9a	$ 881,080

a There is a small rounding error

Sales Forecastin

Through sales forecasting, a retailer estimates its expected future revenues for a given period; forecasts may be companywide, departmental, and for individual merchandise classifications.

The most important step in financial merchandise planning is an accurate sales forecast. An incorrect projection throws off the entire process.

Firm wide and department wide sales of larger retailers are often forecast by the use of trend analysis, time series analysis, and multiple regression analysis. Small retailers rely more on “guesstimates.”

One way to forecast sales for narrow categories is first to project sales on a company basis and by department and then to break down figures into merchandise classifications.

External factors, internal company factors, and seasonal trends must be anticipated and taken into account.

External factors include consumer trends, competitors’ actions, the state of the economy, the weather, and new supplier offerings.

Internal company factors include additions and deletions of merchandise lines, revised promotion and credit policies, changes in hours, new outlets, and store remodeling.

Table 16.7 shows a sales forecast for Handy Hardware.

Table 16.8 Handy Hardware Store, 2016 Sales by Month

Month	Monthly Actual Sales	Sales Index*
January	$ 46,800	67
February	40,864	58
March	48,000	69
April	65,600	94
May	112,196	160
June	103,800	148
July	104,560	149
August	62,800	90
September	46,904	67
October	46,800	67
November	66,884	96
December	94,792	135
Total yearly sales	$ 840,000	blank
Average monthly sales	$ 70,000	blank
Average monthly index	blank	100

After a yearly forecast is devised, it should be broken into quarters or months. In retailing, monthly forecasts are usually required.

A monthly sales index is calculated by dividing each month’s actual sales by average monthly sales and multiplying the results by 100.

Table 16.8 shows actual monthly sales and monthly sales indexes for Handy Hardware.

Next, monthly forecasts are calculated, given a yearly sales forecast. Table 16-9 shows how Handy Hardware’s 2017 monthly sales can be forecast.

Table 16.9 Handy Hardware Store, 2017 Sales Forecast by Month

Month	Actual Sales 2016	Monthly Sales Index	Monthly Sales Forecast for 2017a
January	$ 46,800	67	$ 73,423 × 0.67 = $ 49,193
February	40,864	58	73,423 × 0.58 = 42,585
March	48,000	69	73,423 × 0.69 = 50,662
April	65,600	94	73,423 × 0.94 = 69,018
May	112,196	160	73,423 × 1.60 = 117,477
June	103,800	148	73,423 × 1.48 = 108,666
July	104,560	149	73,423 × 1.49 = 109,400
August	62,800	90	73,423 × 0.90 = 66,081
September	46,904	67	73,423 × 0.67 = 49,193
October	46,800	67	73,423 × 0.67 = 49,193
November	66,884	96	73,423 × 0.96 = 70,486
December	94,792	135	73,423 × 1.35 = 99,121
Total sales	$ 840,000	blank	Total sales forecast $881,080b
Average monthly sales	$ 70,000	blank	Average monthly forecast $ 73,423

a Monthly sales forecast = average monthly forecast × (Monthly index/100). In this equation, the monthly index is computed as a fraction of 1.00 rather than 100.

b There is a small rounding error

Inventory-Level Planning (1 of 2)

Four techniques:

Basic stock method

Basic stock (at retail) = Average monthly stock at retail − Average monthly sales

Beginning-of-month planned inventory level (at retail) = Planned monthly sales + Basic stock

Percentage variation method

Inventory-Level Planning

Inventory levels are planned for a time period. The level must be sufficient to meet sales expectations, allowing a margin for error. Several planning techniques are available. With the basic stock method, a retailer carries more items than it expects to sell over a specified period. There is a cushion if sales are more than anticipated, shipments are delayed, or customers want to select from a variety of items. It is best when inventory turnover is low or sales are erratic over the year.

Basic stock (at retail) = Average monthly stock at retail – Average monthly sales

Beginning-of-month planned inventory level (at retail) = Planned monthly sales + Basic stock

In the percentage variation method, beginning-of-month planned inventory during any month differs from planned average monthly stock by only one-half of that month’s variation from estimated average monthly sales:

Beginning-of-month Planned average monthly stock at retail

planned inventory = x 1/2 [1 + (Estimated monthly sales/

level (at retail) Estimated average monthly sales)]

Inventory-Level Planning (2 of 2)

Weeks’ supply method

Beginning-of-month weekly sales planned inventory level (at retail) = Average estimated weekly sales × Number of weeks to be stocked

Stock-to-sales method

The weeks’ supply method forecasts average sales weekly, so beginning inventory equals several weeks’ expected sales:

Beginning-of-month Average estimated weekly sales

planned inventory = x Number of weeks to be stocked

level (at retail)

With the stock-to-sales method, a retailer wants to maintain a specified ratio of goods on hand to sales. Like the weeks’ supply method, this approach tends to adjust inventory more drastically than changes in sales require. Yearly stock-to-sales ratios by retail type are provided by Dun & Bradstreet and RMA.

Planning Purchases: Open to Buy

Planned purchases (at retail) = Planned sales for the month + Planned reductions for the month + Planned end of month inventory − Beginning of month stock

Open to buy (at retail) = Planned purchases for month less purchase commitments for that month

Open to buy (at cost) = Open to buy at retail times cost complement

Planning Purchases

Planned purchases (at retail) = Planned sales for the month + Planned reductions for the month + Planned end-of-month stock – Beginning-of-month stock.

Planned purchases (at cost) = Planned purchases at retail x Merchandise costs as a percentage of selling price.

Open-to-buy is the difference between planned purchases and the purchase commitments already made by a buyer for a given period, often a month. It represents the amount a buyer has left to spend for that month and is reduced each time a purchase is made. Open-to-buy is recorded at cost:

Open-to-buy (at retail) = Planned purchases for the month – Purchase commitments for that month.

Open-to-buy (at cost) = Open-to-buy at retail x Merchandise costs as a percentage of selling price.

The open-to-buy concept has two major strengths. It maintains a specified relationship between inventory and planned sales.

It lets a firm adjust purchases to reflect changes in sales, markdowns, and so on. From a strategic perspective, it is advisable for a retailer to keep at least a small open-to-buy figure to take advantage of special deals, purchase new models when introduced, and fill in items that sell out.

Figure 16.3 A Checklist to Reduce Inventory Shortages

Reduction Planning

Retail reductions represent the difference between beginning inventory plus purchases during the period and sales plus ending inventory. Planned reductions incorporate anticipated markdowns (discounts to stimulate sales), employee and other discounts (price cuts to employees, senior citizens, and others), and stock shortages (pilferage, breakage, and bookkeeping errors).

Planned reductions = (Beginning inventory + Planned purchases) – (Planned sales + Ending inventory).

Reduction planning revolves around these two key factors:

Estimating expected total reductions by budget period.

Assigning the estimates monthly.

Reduction planning should consider past experience, markdown data for similar retailers, changes in company policies, merchandise carryover from one budget period to another, price trends, and stock-shortage trends. Figure 16.3 shows a checklist to reduce shortages from clerical and handling errors.

Figure 16.4 (Time Consuming) Physical Inventory Systems

Unit control systems deal with quantities of merchandise in units rather than in dollars. Information typically reveals the following:

Items selling well and those selling poorly.

Opportunities and problems in terms of price, color, style, size, and so on.

The quantity of goods on hand.

An indication of inventory age.

The optimal time to reorder merchandise.

Experiences with alternative sources (vendors) when problems arise.

The level of inventory and sales for each item in every branch store.

Physical Inventory Systems

A physical inventory unit control system is similar to a physical inventory dollar control system. However, it examines the number of units by item classification. See Figure 16.4.

In a visual inspection system, merchandise is placed on pegboard (or similar) displays. Each item is numbered on the back or on a stock card. Minimum inventory quantities are noted, and reordering occurs when inventory reaches the minimum level. Accuracy occurs only if items are placed in numerical order on displays (and sold accordingly).

The system is easy to maintain and inexpensive.

It does not provide data on the rate of sales; and minimum stock quantities may be arbitrarily defined.

A stock-counting system involves actual counting. It means regularly compiling the number of units on hand. It records inventory on hand, purchases, sales volume, and shortages during specified periods.

The system requires more clerical work than the visual method.

The Time-Consuming Nature of Physical Inventory Systems

Conducting a physical inventory can be extremely time consuming. Think about how much effort an apparel and accessories retailer with a large merchandise mix, such as the one depicted here, would have to exert.

Perpetual Inventory Unit Control Systems

Running total of number of units, three forms

Point-of-sale (POS) & optical scanners/barcoding)

Manual systems, employee examination and documentation

Merchandise tagging system

Networked, computerized POS systems

Perpetual Inventory Systems

A perpetual inventory unit control system keeps a running total of the number of units handled by a retailer through record keeping entries that adjust for sales, returns, transfers to other departments or stores, receipt of shipments, and other transactions. All additions to and subtractions from beginning inventory are recorded. This system is available in three forms.

A point-of-sale (POS) system feeds data from merchandise tags or product labels directly to in-store computers for immediate data processing:

Many systems rely on optical scanners.

Figure 16-5 shows how barcoding works.

A manual system requires employees to examine sales checks, merchandise receipts, transfer requests, and other documents. Data are then coded and tabulated.

A merchandise tagging system relies on pre-printed tags with data by department, classification, vendor, style, date of receipt, color, and/or material. When an item is sold, a copy of the tag is sent to a tabulating facility for computer analysis.

Current POS systems are easy to network, have battery backup capabilities, and run with standard PCs and software.

Many retailers combine perpetual and physical inventory systems to maximize efficiency.

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.

Perpetual