Retail Inventory Terms
Merchandise businesses rely on their inventory management procedures in order to keep the business operating. The business creates a facility where it displays the retail merchandise for sale. Customers visit the business, choose the items they want to buy and pay for the items. Employees working in the retail industry need to be familiar with the inventory terms used in that industry.
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Cost of Goods Sold
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Cost of goods sold refers to the company's cost of acquiring the inventory that has been sold to customers. The company does not recognize cost of goods sold until the customer actually takes ownership of the merchandise. Determining the cost of goods sold includes quantifying several components. These components include the purchase price of the inventory and any freight costs incurred to receive the inventory. These components also include any discounts provided for early payments or for purchasing large quantities. The cost of goods sold represents an expense to the company.
Purchases
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Purchases refers to each of the merchandise inventory shipments bought and received by the company during a specific period in time. Company buyers oversee the purchasing process and negotiate prices with vendors. The buyer then places the actual order with the vendor. When the company receives the inventory in the warehouse, the buyer reviews the quantity and price on the invoice and approves the invoice if these match. At the end of the period, the buyer reviews the total purchases for the period and adjusts future orders if needed.
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Physical Audit
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A physical audit occurs a minimum of once per year. During a physical inventory count, company employees walk through the warehouse and the retail store. These employees identify each inventory item and count the quantity remaining on the shelf. The physical audit requires the company's internal auditors as well as external auditors to walk through the same locations and recount the quantities. This allows the company to confirm that the original count was correct. Once the company knows exactly how many units it has on hand, the company compares this amount to the quantity recorded in the inventory system. The company records any necessary adjustments so the physical inventory count matches the inventory system.
Shrinkage
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Many retail companies encounter inventory shrinkage. Inventory shrinkage occurs when some inventory items disappear. Inventory disappears as a result of shoplifting, employee theft or inventory errors.
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