Merchandise inventory is one of the types of inventory that directly and substantially impacts a company’s financial health.
- The total amount of assets, which includes merchandise inventory, impacts a company’s solvency, or ability to meet its financial obligations.
- Merchandise inventory turnover rate reflects a company’s ability to sell its products. It gives you a metric to focus on improving to enhance your sales pipeline.
- A company’s cost of goods sold (COGS), is based in part on merchandise inventory figures. This is one of the most important measurements of a profitable, successful business.
Ignore merchandise inventory and you immediately squander an opportunity to enhance the health of your business. Embrace it—learn everything you can about it—and you’ll have taken one of the biggest steps toward profitability a company can take.
What Is Merchandise Inventory?
Merchandise inventory is all the goods that a distributor, wholesaler, or retailer acquires from manufacturers that are intended for sale. Typically every online marketplace and retailers are the only businesses with merchandise inventory. That’s because, fundamentally, merchandise inventory is goods that are intended to be resold at a higher price than they were acquired for.
This means it's unlikely a B2B business will have to worry about it. Read more about what is a B2B company to get a better understanding of a B2B business.
Merchandise Inventory Includes...
Merchandise inventory includes all acquired pipeline inventory that is intended for resale from suppliers, in company storage facilities, on customer-facing displays, and as consignment inventory in other locations.
It also includes the price that was paid for the goods, all shipping costs that retailers or resellers paid, eCommerce packaging expenses, and transit insurance. Shipping costs, including overnight shipping, is calculated using a shipping cost estimator.
What Is Merchandise On Hand?
Merchandise on hand is the cost of goods on hand and available for sale at any given moment. Merchandise on hand is a type of merchandise inventory. It does not include the cost of goods that are in transit or inventory shrinkage. However, it does include finished goods inventory, any inventory in your warehousing, goods held on consignment, and safety stock.
Is Merchandise Inventory an Asset?
Merchandise inventory is an asset. There are two main types of assets: current and non-current.
Non-current assets include long-term investments, intangible assets like intellectual or technological property, and physical property and equipment. Current assets, on the other hand, are assets that can be reasonably expected to be converted into cash within one operating cycle or fiscal year.
Merchandise inventory is a current asset on the balance sheet. This includes a restaurant balance sheet.
Why Is Merchandise Inventory a Current Asset?
A current asset is an asset that provides economic benefit during a given year or operating cycle. Think of anything that can be reasonably expected to be sold or used during that time frame. Merchandise inventory is one of the clearest examples of a current asset because it’s usually liquidated within a year of being produced or acquired.
What Type of Account Is Merchandise Inventory?
Merchandise inventory is the account on a balance sheet that reflects the total amount paid for products that are yet to be sold. As a current asset, merchandise inventory is basically a holding account for inventory that’s waiting to be sold.
It has a normal debit balance, so debit increases and credit decreases. Merchandise inventory is not only reflected on the balance sheet, but also used to calculate COGS.
Merchandise Inventory On Income Statement
Merchandise inventory is not an income statement account. It’s an asset, and its ending balance is reported as a current asset on your balance sheet. COGS, however, is on your income statement and changes in your merchandise inventory affect your COGS.
The cost of any merchandise inventory sold during an accounting cycle is reported as an expenditure on the income statement for the cycle in which the sale was made. Any merchandise inventory not sold during an accounting cycle is a current asset and included in the balance sheet until it’s sold.
Tracking inventory is possible using inventory valuation methods. These include:
- First, First Out (FIFO): The FIFO method involves selling and shipping out the first items you receive from your manufacturer to your customers.
- Last In, First Out (LIFO): This method sells and ships out the most recently purchased inventory items first.
- Weighted average: With this process, the average cost of purchased goods is calculated from the available inventory.
- Specific identification: Involves tracking each inventory item from the initial purchase to the sale.
After choosing a method, you have to pick a system that allows you to track inventory value as frequently as you need it to. Physical counts of inventory are also necessary.
Merchandise Inventory Turnover
Tracking merchandise inventory turnover is a good way to understand how efficiently your company controls merchandise. Specifically, you should work toward establishing and maintaining high merchandise inventory turnover. Keep a close eye on inventory tracking numbers to make adjustments on the fly.
High merchandise inventory turnover reveals two facts:
- You’re not needlessly keeping money tied up in sitting inventory
- The liquidity of your inventory
If you’ve got cash tied up in stock that’s moving and you can’t sell products, you’re headed down a troubling road. A high merchandise inventory turnover means your company smoothly turns merchandise into cash. Whether that's because of a vendor managed inventory agreement, expertly managed pipeline inventory, or good old fashioned in-house inventory control, any company that does that is a healthy one.
Merchandising Inventory Methods
There are two primary merchandising inventory methods: perpetual and periodic.
Perpetual Merchandising Inventory
The perpetual merchandising inventory method maintains an ongoing tally of quantity and value of your merchandise inventory. Every time stock is added or removed, the balance is adjusted.
Perpetual inventory is virtually impossible to implement without automation, unless your business sells a low volume of high-cost items, like a car dealership. But the easiest way to establish perpetual merchandising inventory is to automate your inventory using inventory management techniques. This includes inventory management software.
Periodic Merchandising Inventory
The periodic merchandising inventory method does not maintain an ongoing tally of inventory quantity and value. Instead, inventory is taken at specific intervals. To determine changes in merchandising inventory, the results of two inventories are compared.
Periodic inventory is often used by two types of businesses:
- Smaller businesses that are able to manually account for their inventory in a reasonable amount of time. These businesses don’t need or have the resources for automation software.
- Businesses that sell low-value items in such high volume that perpetually tracking such a massive amount of small inventory changes doesn’t make sense. Think of a hardware store selling all sorts of nuts, bolts, and screws. Or a candy shop selling individual pieces of hundreds of types of candy. The granular inventory management or perpetual inventory loses some of its value when there are so many transactions.
Periodic inventory tends to be inaccurate, though. It’s often manually done and prone to human error. It also doesn’t provide any real-time insights into your COGS, turnover rate, or other inventory metrics that successful businesses let inform their day-to-day decision making.
How to Calculate Merchandise Inventory
Calculating merchandise inventory uses multiple fields from your company’s income statement. Specifically from the COGS section of the income statement.
To calculate merchandise inventory, you’ll need:
- Beginning inventory
- Inventory purchased
If you don’t have those specific values, you can use the below formulas to calculate them. All below values are in USD.
How to Calculate Beginning Merchandise Inventory
Here’s how to calculate beginning merchandise inventory:
Beginning Inventory = (Ending Inventory + COGS) - Inventory Purchased
Take, for example, a company that sells 12-ounce bags of coffee for $15 each. Their last accounting period ended with a total of 400 bags of coffee on the books, unsold. Over the accounting period, they sold 1,000 bags and purchased 500.
Beginning Inventory = ($6,000 + $15,000) - $7,500
Beginning Inventory = $13,500
Calculating Merchandise Inventory
To calculate merchandise inventory, you take the cost of goods available for sale minus COGS.
Here’s how to calculate merchandise inventory:
Merchandise Inventory = Cost of Goods Available for Sale - COGS
Merchandise Inventory = (Beginning Inventory + Purchased Inventory) - COGS
Merchandise Inventory = ($13,500 + $7,500) - $15,000
Merchandise Inventory = $6,000
We can consider “merchandise inventory” to be the ending inventory amount because that’s what gets reported on the balance sheet. According to the above calculation, your business has $6,000 worth of inventory ready to be sold. This will help you better understand and hit your inventory KPI.
Quiz: The Following Statements Regarding Merchandise Inventory Are True Except
Here’s a merchandise inventory quiz to reiterate some of the more important points from this post. If you want to earn that warehouse manager salary, you should be able to answer these questions.
The following statements regarding merchandise inventory are true:
- Merchandise inventory is reported as a non-current asset on the balance sheet
- Merchandise inventory is the same as work in process inventory
- Examples of current assets on a balance sheet are cash and merchandise inventory
- Merchandise inventory is not expected to be sold within a year
- Merchandise inventory is the cost of goods available for sale minus the cost of goods sold for a given period of time
If you chose 1, 3, and 5 you are correct! You are a merchandising inventory genius.
The following statements regarding merchandise inventory are true except:
- Merchandise inventory is an account that shows how much value a company holds in products it has yet to sell
- A high merchandise inventory turnover rate is a healthy indicator for a business
- Merchandise inventory includes property, equipment, and intangible assets like intellectual property
If you chose 3, you are correct! You are truly a merchandising inventory genius. Now use that knowledge in your inventory forecasting and when calculating your fill rate to make the most of your product.
Frequently Asked Questions About Merchandise Inventory
If you’re putting together an inventory management plan for the first time, you’ll want to give merchandise inventory some dedicated focus. Learn more about this inventory type with the common questions below:
What Is Merchandise Inventory?
Merchandise inventory is any kind of product that a company has on hand that is intended for sale. The term merchandise inventory includes the value of goods, including raw materials or finished goods, that are ready to be sold to customers.
What Is an Example of Merchandise Inventory?
There are many examples of merchandise inventory, including shoes, books, headphones, food products, and auto parts.
Merchandise inventory is the last inventory stage a product is in before it’s sold to a customer. Batch picking is also frequently used to get merchandise inventory out to customers faster. Having a strong warehouse outbound process flow for your merchandise inventory helps prevent shipping issues, too.
Bear in mind that merchandise inventory can be used while selling wholesale, retailing/B2C, and C2C. It’s an inventory category, not a type of inventory that is exclusive to one industry or another.
How Do You Record Merchandise Inventory?
Merchandise inventory is recorded as a prepaid expense by an accountant. The reason it’s considered a prepaid expense is that the inventory has already been under your possession by the time it’s ready for sale; there’s no future expense to pay.
When merchandise inventory is sold, it’s moved from the asset category to the expense category. This is because any product that is sold first needs to be created or purchased, which always incurs an expense.
Is Merchandise Inventory an Asset?
Merchandise inventory is a current asset. is because the business has plans to sell the inventory for profit.
Is Merchandise Inventory a Quick Asset?
Merchandise inventory isn’t considered a quick asset. This is because merchandise inventory can’t be converted to cash rapidly. In order to be a quick asset, you’d have to sell inventory immediately and receive payment on the spot, which is often impossible.
Quick assets, sometimes referred to as current assets, are only those assets that can be quickly converted to cash. Examples include your business’s cash balances, accounts receivable (payments due to you), and marketable securities.