Quick Vocab to Review

📌 The cornerstone of merchandising from a buyer’s standpoint is gauging inventory costs.

• Obviously, inventory costs represent the amount paid by merchandisers to procure products intended for resale.
• However, “inventory costs” can go much deeper. While the initial purchase price of the inventory forms the core of these costs, many other transactions and considerations can influence the final recorded cost of inventory.
‣
Increases to Inventory Costs Examples
• Transportation-In Costs: Often, the cost to transport inventory from suppliers to the buyer's place is borne by the buyer. This transportation cost is added to the inventory cost. It's common to see terms such as 'FOB shipping point', indicating that the buyer bears freight charges.
• Import Duties and Taxes: If inventory is purchased from international suppliers, there might be import duties, tariffs, or taxes to pay. These increase the cost of inventory.
• Packaging: Custom packaging or any specific requirements to maintain the quality of goods can also add to the cost.
• Insurance: If a company insures its inventory, the insurance premium related to the period before the inventory is sold can be added to inventory costs.
‣
Decreases to Inventory Costs Examples
• Purchase Discounts: As mentioned with credit terms (like 2/10, n/60), buyers might get a discount for paying suppliers early. This discount reduces the inventory cost.
• Purchase Returns: If goods are found defective or not according to specifications, they might be returned to the supplier, decreasing the total inventory cost.
• Purchase Allowances: Similar to returns, if the buyer decides to keep a defective product but requires compensation for the defect, the compensation (or allowance) granted by the seller would reduce the inventory cost.
• Volume Rebates: Sometimes, suppliers provide rebates when large volumes are purchased, effectively reducing the per-unit cost of inventory.
‣

Recording Inventory Costs & System Differences

‣

Perpetual Inventory System

• In a perpetual system, every transaction involving inventory – be it a purchase, return, or sale – triggers a corresponding journal entry in real-time. This means your accounting system always mirrors the current inventory status.

‣

Periodic Inventory System These distinctions between perpetual and periodic systems are crucial. They dictate how and when you record inventory costs and adjustments, impacting your financial statements' accuracy and timeliness.

• In contrast, the periodic system accumulates all inventory-related transactions and adjusts the inventory count only at specific intervals, typically the end of a financial period.
• All acquisitions during the period boost the beginning inventory, while adjustments for returns, discounts, and allowances get made at the end.

📌 When you hear "purchasing on credit," think of it as a buy-now-pay-later system.

• Making purchases on credit implies that a buyer acquires the inventory right away but is permitted to pay for it at a later date, as agreed upon in the negotiated credit terms.
• This mechanism not only fosters flexibility but also optimizes cash flow for businesses. However, it's imperative to stay aware of any credit terms to avoid missing out on early payment discounts or inadvertently incurring late fees.

📌 As a buyer, taking advantage of credit terms, especially early payment discounts, can effectively cut down your inventory costs.

📌 Net Purchases reflect the actual cost of inventory after all adjustments.

• You received a purchase discount of $200 for early payment.
• You returned 2 pieces due to defects, reducing the amount by $100 (2 x $50).
• You got a purchase allowance of $50 for some minor scratches on a few pieces.
• You also paid $150 in shipping (since it was FOB Shipping Point, meaning the buyer is responsible).

📌 Purchase discounts offer a direct route to reducing your inventory costs.

• If you pay within 10 days, you can receive a 2% discount: $10,000 x 2% = $200.
• So, by paying early, you only pay $9,800, saving $200!

📌 Even with the best suppliers, sometimes things aren't perfect.

• 5 computers x $500 = $2,500.
• This amount would be deducted from your payable, reducing the amount owed to your supplier.
• In additon, we would deduct the amount of the return from your total inventory cost.

📌 Sometimes, it's not about returning the items but about negotiating the price.

• Original cost: 5 computers x $500 = $2,500.
• Reduced cost: 5 computers x $400 = $2,000.
• The purchase allowance here is $500 ($2,500 - $2,000).

📌 As a buyer, shipping costs are more than just another cost. They have accounting implications that directly impact how inventory is valued.

📌 This is the total amount you earn from selling your products to another business.

• Say you're a wholesaler selling 100 shirts at $15 each to a retailer; your sales revenue is $1500.

📌 When you think of "selling on credit," think of it as a sold-now-get-paid-later arrangement.

• When you make inventory sales on credit, it means you're providing your customer with the goods immediately, but you'll be receiving payment at a later specified date, based on the credit terms set.
• Offering credit sales can be a strategy to attract more customers and boost sales volume. However, it's also a balance of trust and risk. On one hand, extending credit can build customer loyalty and increase order sizes. On the other, there's a risk of delayed or defaulted payments.
• Therefore, it's essential to have clear credit policies in place, conduct thorough credit checks, and consistently monitor receivables. The aim is to capitalize on the benefits of credit sales while minimizing potential drawbacks.

📌 Offering credit terms with discounts can incentivize your buyers to pay early, improving your cash flow and reducing the risk of delayed payments.

📌 These are incentives to get the other business to pay you sooner.

• For instance, offering terms like "2/10, n/30," means they get a 2% discount if they pay within 10 days, but the full amount is due in 30 days. It encourages faster payment and improves your cash flow.

📌 These occur when customers send back products they've previously purchased from us.

• Overview: Businesses, like consumers, sometimes return products. Maybe the batch of shirts had defects, or they over-ordered.
• Impact: A returned item reduces your sales revenue. If the returned items are in good condition, they're added back to your inventory. If damaged, they might be sold at a discount or written off.
• Example: A retailer returns 10 shirts from a batch due to color inconsistencies. You adjust your sales figures and inspect the returned items for potential resale or write-off.

📌 These refer to price reductions given to dissatisfied customers who decide to keep the product, rather than return it.

• Overview: Perhaps there's a minor defect, but the buyer is willing to keep the items for a reduced price.
• Impact: You'll reduce the sales amount but save on restocking or scrapping costs.
• Example: A retailer notices a few shirts have slight stitching errors but agrees to keep them if given a 10% discount. You adjust the invoiced amount to reflect this.

📌 After accounting for returns, allowances, and discounts, you get the actual amount you've earned from sales, known as net sales.

📌 Remember, the term "Cost of Goods Sold" is to be taken literally. It specifically refers to the cost to us of the goods we have sold. It’s not about the selling price at which we sold the item to customers; it’s about how much the item cost us initially. Since we're aiming for a profit, COGS should ideally be less than the selling price. So, when thinking COGS, always think "cost", not "selling price".

• When an item is sold, its associated cost (what the merchandiser initially paid when buying it) becomes an expense, known as Cost Of Goods Sold, or COGS for short.
• COGS is vital for determining profitability, and is calculated using what I call the "Holy Grail" of inventory formulas: Beginning Inventory + Net Purchases = Goods Available for Sale - Ending Inventory = COGS (More on this formula can be found in the items to memorize section)

📌 Shipping costs may seem straightforward, but there's more under the surface, especially for sellers.

• Importantly, when using perpetual inventory systems, a sale requires two journal entries:
1. One documenting the sale amount (invoice amount to the buyer).
2. Another detailing the product's original cost (COGS).

More information regarding these journal entries will be provided in the “Items to Memorize” and “Journal Entries to Master” section of this cheat sheet.

📌 Markup is the difference between the cost of acquiring a product (its cost price) and its selling price. It's the amount you add to your cost to arrive at the selling price.

📌 A measure of how many times inventory is sold or used over a specific period. It indicates the efficiency of inventory management and sales.

• Calculation: Inventory Turnover = COGS/Average Inventory
• Interpretation: A higher turnover indicates efficient selling of inventory, whereas a low turnover might mean overstocking or lack of demand.
• Example: If a retailer had COGS of $500,000 and an average inventory of $100,000, their inventory turnover would be 5 times — or, they’re “turning over” inventory 5 times a year.
• 500,000/100,000 = 5

📌 Inventory shrinkage refers to the loss of products between the point of manufacturing or purchase from a supplier and the point of sale.

• Causes: Shrinkage can occur due to various reasons, including theft, errors in record-keeping, damage during transportation, or employee dishonesty.
• Impact: Shrinkage directly impacts the bottom line as businesses cannot realize sales from lost inventory. It also results in higher indirect costs when businesses invest in security measures or system overhauls.
• Example: A store that expects to have 100 units of a product based on its records but only finds 95 units during a physical count. This store has “inventory shrinkage” of 5 units.

📌 Inventory obsolescence refers to the decrease in the value of inventory items due to them becoming outdated or no longer in demand.

• Causes: Rapid technological advancements, changes in consumer preferences, or the introduction of a superior product in the market can lead to inventory obsolescence.

• Impact: Obsolete inventory often must be sold at discounted prices or written off, leading to losses.

• Example: An electronics store that has older models of smartphones might face inventory obsolescence if new models with advanced features become popular, and demand for older models decreases.

📌 Consignment is a business arrangement where one party (the consignor) provides goods to another (the consignee) to sell, but the goods remain the property of the consignor until sold.

• Key Points:
• The consignee sells on behalf of the consignor for a commission.
• Unsold goods can be returned to the consignor.
• Example: An artist providing paintings to a gallery to sell. The gallery takes a commission on each sale and returns any unsold paintings to the artist.

📌 Dropshipping is a retail fulfillment method where a store doesn't keep the products it sells in stock. Instead, when a product is sold, the store purchases the item from a third party and has it shipped directly to the customer.

• Advantages: Low upfront investment, wide product selection, and reduced overhead costs.
• Challenges: Lower profit margins, inventory issues (as it's not controlled directly), and shipping complexities.
• Example: An online retailer that advertises a variety of products on its website but only purchases and ships them from suppliers once it receives customer orders is using the dropshipping model.

📌 This refers to the smallest amount of a specific product that a supplier is willing to sell to a buyer.

• If, for example, a supplier stipulates an MOQ of 500 units, a buyer cannot purchase fewer than that number. This often helps suppliers ensure profitability and manage inventory effectively.
• For buyers, understanding and negotiating MOQ is crucial to manage cash flow and storage.

📌 It's the oversight of end-to-end processes involved in producing and delivering goods to the end consumer.

• This includes everything from sourcing raw materials to the production process, storage, distribution, and delivery.
• Efficient supply chain management ensures timely delivery, reduces costs, and improves customer satisfaction.

📌 These are the regulatory bodies governing the movement of goods across national borders.

• They ensure that items entering a country comply with local regulations, are correctly declared and taxed. For a merchandiser involved in importing, understanding customs regulations is crucial to avoid delays and penalties.

📌 Companies that provide outsourced logistics services.

• From warehousing to transportation, 3PLs can manage multiple aspects of the supply chain, allowing businesses to focus on their core operations. Employing 3PL can lead to cost savings, increased efficiency, and scalability.

📌 This pertains to the final step in the delivery process, transporting an item from a local distribution center to the end consumer.

• It's often the most complex and expensive part of the shipping process, especially in urban areas. Innovations in last-mile fulfillment aim to reduce costs and increase speed.

📌 A POS system is where a customer makes a payment to a merchant in exchange for goods or services. Modern POS systems are often digital and can manage inventory, sales, and customer data.

• Advantages: Streamlined operations, real-time data, and enhanced customer experience.
• Example: A retail store using a digital cash register that tracks sales, manages inventory, and even offers loyalty points to customers.

📌 An SKU is a unique alphanumeric code assigned to each product or item for the purpose of identification and inventory management.

• Advantages: Helps in tracking inventory, simplifying restocking, and analyzing sales.
• Example: In a large retail store, each variety and size of clothing might have its own SKU to differentiate it from other items.

📌 This is Amazon's fulfillment service where sellers store their products in Amazon's fulfillment centers, and Amazon handles storage, packaging, and shipping to the end customers.

• Key Features:
‣
Hands-off Fulfillment
• Once a product is listed on Amazon using FBA, Amazon takes care of the rest. When an order is placed, Amazon packs, ships, and even handles customer service and returns.
‣
Prime Eligibility
• Products fulfilled by FBA are eligible for Amazon Prime's 2-day shipping, giving sellers a competitive advantage and potentially increasing sales.
‣
Scale
• FBA allows sellers to scale their business without worrying about fulfillment logistics. Amazon's vast network can handle large order volumes, especially during peak seasons.
‣
Global Reach
• Using FBA, sellers can easily cater to international markets using Amazon's global fulfillment network.
‣
Multi-Channel Fulfillment
• Sellers can use FBA to fulfill orders from other sales channels beyond Amazon.
‣
Considerations
‣
Fees
• FBA comes with various fees, including storage fees and fulfillment fees. Merchandisers need to factor these into their pricing strategy.
‣
Inventory Management
• While Amazon handles fulfillment, sellers need to manage their inventory levels efficiently to avoid long-term storage fees and stockouts.
‣
Brand Experience
• The packaging and branding are all Amazon-centric, which might not align with a seller's desired brand presentation.
‣
Returns
• Amazon has a customer-friendly return policy. While this is great for consumers, sellers might see higher return rates.
‣
Real-World Example
📌 Imagine you're a merchandiser selling handmade jewelry.
• Instead of setting up your own website, managing inventory storage, handling packaging, and organizing shipping, you decide to use Amazon FBA.
• You send a bulk shipment of your jewelry to Amazon's warehouse. Then, you set up a product listing on Amazon’s website that, upon review, is posted for customers to see.
• Now, whenever a customer places an order on Amazon for your product, Amazon handles everything from packing to shipping to customer service.
• Your primary focus can remain on product quality and marketing, while Amazon's vast infrastructure supports the operational side.