Chapter 8

Managing a Retailer’s
Finances
 Intended Learning Outcomes
• Describe the importance of a merchandise
budget
• Prepare a six-month merchandise plan
• Explain the differences among and the uses of
these three accounting statements: income
statement (profit & loss a/c), balance sheet,
and statement of cash flow
 The Merchandise Budget
• Merchandising: Planning and control of the
buying and selling of goods and services
• Merchandise budget: Plan of projected sales
for an upcoming season:
• When and how much merchandise is to be
purchased
• What markups and reductions will likely occur

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 Markup vs. Gross Margin

Markup = (Sales – Cost) / Cost

Gross Margin = ?
= (Sales – Cost) / price

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 The Merchandise Budget
• In developing the merchandise budget, the
retailer must anticipate:
• Sales for the department, division, or store
• Stock on hand required to achieve the sales plan,
given the level of inventory turnover expected
• Reductions required in the original retail price
• Additional purchase required
• The gross margin that the store or department is
likely to contribute

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 The Merchandise Budget
• Rules to prepare the merchandise budget:
• Should always be prepared in advance of the
selling season
• Language of the budget must be easy to
understand
• Must be planned for a relatively short period of
time
• Should be flexible enough to permit changes

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Exhibit 8.2 – Two-Seasons Dept Store
Six-Month Merchandise Budget

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Exhibit 8.3 - Formulas for the Six-
Month Budget

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Exhibit 8.3 - Formulas for the Six-
Month Budget

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 The Merchandise Budget
• Determining planned sales
• Estimate planned sales for the entire season as
well as for each month
• Examine the previous year’s recorded sales
• Make adjustments for the upcoming merchandise
budget

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 The Merchandise Budget
Planned sales for February?
= Planned sales % for Feb x Planned total sales

= 15% x $500,000

= $75,000

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 The Merchandise Budget
• Determining planned BOM and EOM
inventories
• Stock-to-sales ratio: Depicts the amount of stock
to:
• Have at the beginning of each month to support the
forecasted sales for that month

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 The Merchandise Budget
• Planned average beginning-of-the-month (BOM)
stock-to-sales ratios are:
• Either based on industry averages or are calculated
directly from a retailer’s planned turnover goals
• Fluctuate month to month because sales tend to
fluctuate monthly
• Express inventory levels at retail, not cost
• BOM inventory for one month equals to:
• The end-of-the month (EOM) inventory for the
previous month

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 The Merchandise Budget
BOM for February?
= Planned sales for February x BOM stock:sales

= $75,000 x 3

= $225,000

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 The Merchandise Budget
EOM for February?
= BOM for March (next month)

= $300,000

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 The Merchandise Budget
• Determining planned retail reductions
• Allowances for reductions in the dollar level of
inventory that results from non-sale events
• Three types - Markdowns, employee discounts,
and stock shortages
• Reflect the additional purchases needed for
sufficient inventory to begin the next month
• Are subject to constant change

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 The Merchandise Budget
Planned retail reductions for February?
= Planned Feb sales x Planned Feb reductions %

= $75,000 x 10%

= $7,500

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 The Merchandise Budget
• Determining planned purchases at retail and cost
• Add planned sales, planned retail reductions, and
planned EOM inventory
• Subtract planned BOM inventory
• Planned purchase at cost
• Subtract the markup percentage from the retail
percentage of 100 percent
• Buyer’s planned gross margin
• Take planned initial markup and subtract planned
reductions
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 The Merchandise Budget
Planned purchases at retail for February?
= Planned sales + Planned reductions + (Planned
EOM – Planned BOM)

= $75,000 + $7,500 + ($300,000 - $225,000)

= $157,500

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 The Merchandise Budget
Planned purchases at cost for February?
= Planned purchases at retail x (100% - planned
initial markup %)

= $157,500 x (100% - 45%)

= $157,500 x 55%

= $86,625
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 The Merchandise Budget
Planned initial markup for February?
= Planned purchases at retail – Planned
purchases at cost (or)
Planned purchases at retail x Initial markup %

= $157,500 - $86,625 (or) $157,500 x 45%

= $70,875

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 The Merchandise Budget
Planned gross margin for February?
= Planned initial markup – Planned reductions

= $70,875 - $7,500

= $63,375

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 Retail Accounting Statements
• Accounting practices followed depend on:
• Management objectives
• Size of the retailer
• Types of financial statement
• Income statement (Profit & Loss A/C)
• Balance sheet
• Statement of cash flow

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 Income Statement
• Financial statement that provides a summary
of the sales and expenses for a given period
• Comparison of current and prior results
provides trends or changes in:
• Sales, expenses, and profits

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Exhibit 8.5 a - Retailers’ Basic Income
Statement Format

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 Income Statement
Gross sales Retailer’s total sales including sales for cash or for credit

Returns and Refunds of the purchase price or downward adjustments in

allowances selling prices due to customers returning purchases, or
adjustments made in the selling price due to customer
dissatisfaction with product or service performance
Net sales Gross sales less returns and allowances
Cost of goods sold Cost of merchandise that has been sold during the period

Gross margin Difference between net sales and cost of goods sold

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 Income Statement

Operating expenses Expenses that a retailer incurs in running the business

other than the cost of the merchandise.
Operating profit Gross margin less operating expenses.
Other income or Includes income or expense items that the firm incurs
expenses which are not in the course of its normal retail
operations.
Net profit Operating profit plus or minus other income or
expenses.

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 Balance Sheet
• Financial statement that identifies and
quantifies all the firm’s assets and liabilities
• Shows the financial condition of a retailer’s
business at a particular point in time
• Basic equation for a balance sheet:
Assets = Liabilities + Net worth
• Comparison of current and previous balance
sheets enables to:
• Observe changes in the firm’s financial condition
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Exhibit 8.6A -Retailers’ Basic Balance
Sheet Format

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 Balance Sheet

Asset Anything of value that is owned by the retail firm.

Current assets Assets that can be easily converted into cash within a
relatively short period of time (usually a year or less).
Accounts and/or Amounts that customers owe the retailer for goods and
notes receivable services.
Prepaid expenses Items for which the retailer has already paid, but the
service has not been completed.
Retail inventories Merchandise that the retailer has in the store or in storage
and is available for sale.

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 Balance Sheet
Noncurrent assets Assets that cannot be converted to cash in a short period
of time (usually 12 months) in the normal course of
business.
Goodwill An intangible asset, usually based on customer loyalty,
that a retailer pays for when buying an existing business.
Total assets Equal current assets plus noncurrent assets plus
goodwill.
Liability Any legitimate financial claim against the retailer’s
assets.
Current liabilities Short-term debts that are payable within a year.

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 Balance Sheet

Accounts payable Amounts owed to vendors for goods and services.

Long-term liabilities Debts that are due in a year or longer.
Total liabilities Current liabilities plus long-term liabilities.
Net worth (owner’s Total assets less total liabilities.
equity)

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 Statement of Cash Flow
• Lists sources and types of all cash revenue and
cash expenditures for a given time period
• Positive cash flow - When cash inflow exceeds cash
outflow
• Negative cash flow - When cash outflow exceeds
cash inflow
• Projects the cash needs of the firm

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Exhibit 8.7 b -Typical Cash Inflow and
Outflow Categories

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 Useful Online Resources

https://www.retaildogma.com/
https://www.accountingtools.com/
 Tutorial Exercise
Case: Dolly’s Place
Pg 347

Complete the merchandise budget.

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