Merchandise Inventory
Merchandise Inventory, also known as inventory, goods for resale, or simply stock, refers to the products a company has available for sale to customers. These products can either be bought in a finished state or require some finishing touches before they are ready to be sold.
Merchandise inventory is a current asset on a company’s balance sheet. It is part of the working capital that turns into revenue as a company sells its inventory. Companies that sell physical products like retailers, wholesalers, and manufacturing firms usually have significant amounts of merchandise inventory.
Inventory management is a crucial aspect of any business that sells physical goods. Too much inventory can lead to high storage costs and the risk of unsold goods becoming obsolete or spoiling. On the other hand, too little inventory can lead to stockouts, lost sales, and dissatisfied customers.
The value of the merchandise inventory can be determined by several inventory valuation methods, including First-In, First-Out (FIFO), Last-In, First-Out (LIFO), and weighted average cost. The chosen method can significantly affect the cost of goods sold, gross profit, and net income reported on a company’s financial statements.
Example of Merchandise Inventory
Let’s consider a hypothetical example involving a clothing retailer, “Fashion Forward”.
Fashion Forward sells a variety of items like shirts, pants, dresses, and accessories. All of these items that are available for sale constitute the company’s merchandise inventory.
Let’s say that at the beginning of the year, Fashion Forward’s inventory is valued at $100,000. During the year, the company purchases an additional $300,000 worth of merchandise from its suppliers. This brings the total cost of merchandise available for sale during the year to $400,000.
Over the course of the year, Fashion Forward sells most of its inventory for a total of $750,000 (the sales revenue). Let’s say that the cost of the inventory sold was $250,000. This amount is called the cost of goods sold (COGS), and it represents the cost of the merchandise inventory that was sold to customers.
At the end of the year, Fashion Forward conducts a physical inventory count and finds that it still has $150,000 worth of merchandise left. This remaining amount will be reported as merchandise inventory on the balance sheet.
So, the calculation would be as follows:
- Beginning inventory: $100,000
- Plus purchases: +$300,000
- Minus ending inventory: -$150,000
- Equals COGS: $250,000
In this example, you can see how merchandise inventory directly relates to the cost of goods sold and how it impacts the profit calculation (sales revenue – COGS). This highlights the importance of effectively managing merchandise inventory for a retail business like Fashion Forward.
