P4720- RETAIL OPERATION 2 FIFO vs. LIFO INVENTORY CONTROL

Notes from RETAILING 6th Edition by DUNNE & LUSCH

FIFO
Stands for First In, First Out and values inventory based on the assumption that the oldest merchandise is sold before the more recently purchased merchandise.

• merchandise on the shelf will reflect the most current replacement price

• During inflationary periods this method allows “inventory profits” (caused by selling the less expensive earlier inventory rather than the more expensive newer inventory) to be included as income.


LIFO
Stands for Last In First Out and values inventory based on the most recently purchased merchandise is sold first and the oldest merchandise is sold last.

• designed to cushion the impact of inflationary pressures by matching current costs against current revenues

• costs of goods sold are based on the cost of the most recently purchased inventory; older inventory is regarded as unsold inventory

• during inflationary period, LIFO method results in the application of a higher unit cost to the merchandise sold and lower unit cost to the inventory unsold

• In rapid inflation most retailers use the LIFO method, resulting in lower profits in income statement, thus lower income taxes

• most retailers prefer LIFO for planning purposes since it accurately reflects replacement cost


Sample Situation
You begin the year by a total inventory of 15 home theaters which you purchased on the last day of the preceding year for RM500 each. If these home theater packages were the only merchandise in stock, your beginning inventory was RM7,500 (15xRM500).
Suppose also that during the year you sold 12 packages for RM900 each, for total sales of RM10,800; that in June you purchased 8 new home theater packages (same make and model as the old ones) at RM525; and in November you bought 4 more at RM550.
Thus, your purchase were RM4,200 in June and RM2,200 in November for total of RM6,400 and you will still have 15 home theater packages in stock at the year end.

LIFO ACCOUNTING METHOD
• Ending inventory = beginning inventory = RM7,500
• We assume the 12 packages sold were the 12 purchased during the year

Calculation:
Net sales
RM10,800 (12xRM900)

Beginning inventory
RM7,500(RM15xR500)

Purchases
RM6,400 (RM4,200 in June+RM2,200 in November = RM6,400)

Goods available
RM13,900 (beginning inventory +purchases)

Ending inventory (end of the year)
RM7,500 (beginning inventory=ending inventory)

Cost of goods sold
RM6,400 [(Goods available - ending Inventory) OR
(RM4,200 in June+RM2,200 in November = RM6,400)]

Gross margin
RM 4,400 (Gross margin= Net sales- Cost of goods sold)


FIFO ACCOUNTING METHOD
• We assume we sold 12 of the original RM500 packages and had 3 left.
• These 3 home theater packages + June + November purchases result in ending inventory of RM7,900 [(3xRM500)+(8xRM525)+(4xRM550)]

Calculation:

Net sales

RM10,800 (12xRM900)

Beginning inventory

RM7,500 (15xRM500)

Purchases

6,400 (RM4,200 in June+RM2,200 in November = RM6,400)

Goods available

RM13,900 (beginning inventory +purchases)

Ending inventory (end of the year)

7,900 [(3xRM500)+(8xRM525)+(4xRM550)]

Cost of goods sold

6,000 (Goods available - ending Inventory)

Gross margin
RM 4,800 (Gross margin= Net sales- Cost of goods sold)

Note:
Retailers are permitted to change its method of accounting only once.




Exercise
Instruction: Fill in the blanks with the correct answers.
1. Read the problem question carefully!
2. Calculate and solve this problem using LIFO and FIFO accounting method. Show your work.
3. Send your work here by using the comment box.
4. Send your work before 12.00a.m tonight (27 August 2010).

You begin the year by a total inventory of 20 home theaters which you purchased on the last day of the preceding year for RM600 each. If these home theater packages were the only merchandise in stock, your beginning inventory was RM12,000 (20xRM600).
Suppose also that during the year you sold 13 packages for RM900 each, for total sales of RM11,700; that in June you purchased 8 new home theater packages (same make and model as the old ones) at RM500; and in November you bought 5 more at RM550.
Thus, your purchase were RM4,000 in June and RM2,200 in November for total of RM6,400 and you will still have 20 home theater packages in stock at the year end.

Retailers are permitted to change its method of accounting only ____________.

All the best ;)
Enjoy the long weekend!!!(After you finish this exercise o.k :P)

DRM5 - Negotiating with Vendors; Bargaining Tips for Retailers

Note: This is not an original post by the administrator but it is useful for P4720-Retail Operation 2 & P4723-Fashion Merchandising

Acknowledgment of primary source.
Shari's Retailing Blog
By Shari Waters, Retailing Guide (for further information please refer and be a member of this blog; http://retail.about.com/od/buyinginventory/tp/vendor_negotiations.htm)

Bargaining is an age-old practice that is still common in the marketplace in many countries today. In the United States, most consumers want to avoid the haggle and will simply accept the price on the tag. It is the successful retailer that has learned how to play the game of give and take with their suppliers. Learn how to negotiate with vendors to receive the best pricing and terms on products with these negotiation tips.

1. Be Prepared

Being prepared and informed is the greatest advantage a retailer can have going into vendor negotiations. Learn as much about the supplier and its products as possible. How do their prices compare to the competition? What level of service do they provide their customers? Vendor negotiation preparation also includes setting goals to determine what you want and what you can live with.

2. Always Tell the Truth

Deception tactics, such as bluffing or falsification, may do more damage than good in the vendor negotiation process. Lying is not only unethical, but it can be difficult to maintain. While being honest, be careful not to give away your bargaining power. It's not necessary to tell everything you know, but when you do tell... tell the truth.

3. Show Your Potential

If you are meeting with a potential vendor for the first time, odds are he/she may know nothing about your company. Begin the negotiation with some history about your retail business. Explain any future expansion plans and let the vendor know how doing business with you will help them.

4. Ask About Incentives

The whole idea behind negotiating with manufacturers and suppliers is to receive the best price, payment terms, advertising allowances and even exclusivity. Start by asking what incentives you qualify for and let the negotiations begin from there. Don't be afraid to ask for what you want.

5. Mention the Competition

It is okay to mention the vendor's competition in the negotiation process but don't disclose any pricing or other confidential details. There is nothing wrong with letting a supplier know their competitor is in a good position, whether it is real or perceived.

6. Find a Fair Compromise

Just like the retailer, the vendor must make a profit to stay in business. Vendor relations should be treated as collaboration rather than conquest. As you negotiate a good deal for your retail business, consider the outcome for the supplier.

7. Think Long Term

Establishing a solid, trustworthy relationship with a supplier can only help your retail business. Vendors, who feel the customer will be loyal, may concede to even more incentives in order to maintain a long-term partnership.

8. Take Your Time

Never feel pressured to buy from a salesman. If you're not satisfied with the negotiating process, ask for time to think about the offer.

9. Get It in Writing

As the negotiation process comes to a close, make sure the offer is put to paper. Don't sign any sales contract unless it matches the verbal agreement.

10. Practice Makes Perfect

Not everyone is a natural negotiator. It takes time to learn when to speak, when to be silent and how to read body language. The more you negotiate and sharpen your skills, the better you'll get.

Especially for Muslimah

Note: image of gems is not of administrator's work


Salam all...

As future retailers, we know that we are going to handle different categories of merchandise. There are cheap and expensive merchandise.

Cheap non-perishable merchandise such as food and plastic ware has to be sold immediately.They are displayed on cheap racks; touched, held, poked and even squeezed by customers. There are times when if any of these items fall on the floor, they will not be picked up or maybe ignored, or swept away and dumped in the garbage can.

Whereas, expensive merchandise such as gem and jeweleries, are always handled with care and kept in very expensive display cabinet, with beautiful lighting and locks. Sometime they are kept away in bullet proof vaults. Customers can only look and admire their beauty from afar; no one can touch, hold, poke or even squeeze these items without permission from the store owner. If these customers have the ability to purchase these item, they will continue to care and handle them with love and care.

I put in this analogy just to poke your mind and hope you start thinking about yourselves.

You, my students are precious gems and jeweleries in my eyes. I hope you see yourselves as I do, insya Allah.

Please refer this site insya Allah...
http://www.facebook.com/#!/photo.php?pid=5456875&fbid=423013721575&id=226669856575

BY THE WAY... THIS IS NOT THE WAY TO GO...