Key Terms

Financial Merchandise Management

Occurs when a retailer specifies exactly which products (goods and services) are purchased,
when products are purchased, and how many products are purchased.
Dollar Control
Planning and monitoring the financial merchandise investment over a stated period.
Unit Control
Looks at the quantities of merchandise a retailer handles during a stated period.
Merchandise Available for Sale
Equals beginning inventory, purchases, and transportation charges.
Cost of Goods Sold
Amount a retailer has paid to acquire the merchandise sold during a given time period. It
equals the cost of merchandise available for sale minus the cost value of ending inventory.
Gross Profit
Difference between net sales and the total cost of goods sold. It is also known as gross
margin.
Net Profit
Equals gross profit minus retail operating expenses.
Cost Method of Accounting
Requires the retailer's cost of each item to be recorded on an accounting sheet and/or coded
on a price tag or merchandise container. When 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.
Physical Inventory System
Actual counting of merchandise. A firm using the cost method of inventory valuation and
relying on a physical inventory can derive gross profit only when it does a full inventory.
Book Inventory System
Keeps a running total of the value of all inventory at cost as of a given time. This is done by
recording purchases and adding them to existing inventory value; sales are subtracted to
arrive at the new current inventory value (all at cost). It is also known as a perpetual
inventory system.
FIFO Method
Logically assumes old merchandise is sold first, while newer items remain in inventory. It
matches inventory value with the current cost structure.
LIFO Method
Assumes new merchandise is sold first, while older stock remains in inventory. It matches
current sales with the current cost structure.
Retail Method of Accounting
Determines closing inventory value by calculating the average relationship between the cost
and retail values of merchandise available for sale during a period.
Cost Complement
Average relationship of cost to retail value for all merchandise available for sale during a given
time period.
Control Units
Merchandise categories for which data are gathered.
Classification Merchandising
Allows firms to obtain more financial data by subdividing each specified department into
further categories for related types of merchandise.
Monthly Sales Index
Measure of sales seasonality that is calculated by dividing each month's actual sales by
average monthly sales and then multiplying the results by 100.
Basic Stock Method
Inventory level planning tool wherein a retailer carries more items than it expects to sell over
a specified period:
Basic stock = Average monthly stock at retail - Average monthly sales
Percentage Variation Method
 Inventory level planning method where 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. Under this method:
Beginning-of-month planned inventory level (at retail) = Planned average monthly stock at
retail x 1/2 [1 + (Estimated monthly sales/Estimated average monthly sales)]
Weeks' Supply Method
An inventory level planning method wherein beginning inventory equals several weeks'
expected sales. It assumes inventory is in direct proportion to sales. Under this method:
Beginning-of-month planned inventory level (at retail) = Average estimated weekly sales x
Number of weeks to be stocked
Stock-to-Sales Method
Inventory level planning technique wherein a retailer wants to maintain a specified ratio of
goods on hand to sales.
Retail Reductions
Difference between beginning inventory plus purchases during the period and sales plus
ending inventory. They encompass anticipated markdowns, employee and other discounts,
and stock shortages.
Open-to-Buy
Difference between planned purchases and the purchase commitments already made by a
buyer for a given time period, often a month. It represents the amount the buyer has left to
spend for that month and is reduced each time a purchase is made.
Stock Turnover
Number of times during a specific period, usually one year, that the average inventory on
hand is sold. It can be computed in units or dollars (at retail or cost):
Annual rate of stock turnover (in units) = Number of units sold during year/Average inventory
on hand (in units)
Annual rate of stock turnover (in retail dollars) = Net yearly sales/Average inventory on hand
(at retail)
Annual rate of stock turnover (at cost) = Cost of goods sold during the year/Average inventory
on hand (at cost)
Gross Margin Return on Investment (GMROI)
Shows relationship between total dollar operating profits and the average inventory
investment (at cost) by combining profitability and sales-to-stock measures:
GMROI = (Gross margin in dollars/Net sales) x (Net Sales/Average inventory at cost) = Gross
margin in dollars/Average inventory at cost
Reorder Point
Stock level at which new orders must be placed:
Reorder point = (Usage rate x Lead time) + Safety stock
Order Lead Time
Period from when an order is placed by a retailer to the date merchandise is ready for sale
(received, price marked, and put on the selling floor).
Usage Rate
Average sales per day, in units, of merchandise.
Safety Stock
Extra inventory to protect against out-of-stock conditions due to unexpected demand and
delays in delivery.
Automatic Reordering System
Computerized approach that combines a perpetual inventory and reorder point calculations.
Economic Order Quantity (EOQ)
Quantity per order (in units) that minimizes the total costs of processing orders and holding
inventory.