There are many different things that go behind the seven when a company is working. Among them is the merchandise inventory. This is the type of inventory where you keep all of your goods. Managing the company and keeping things in check are two main parts of this. Merchandise inventory plays a crucial role in the business’s operations and allows production to be smooth.
If you work for a company and don’t know what merchandise inventory is, don’t worry. This article has covered everything you need to know. So, let’s have a look into the article and examine all the intricacies related to it.
Part 1: What is Merchandise Inventory
The first question that you might have is, what is this merchandise inventory? Merchandise inventory is basically the inventory where all kinds of goods are present. It also refers to the value of all the goods that are being used in the inventory. This means whether it is the finished products or raw materials and even the products that are used to sell. The merchandise inventory is basically a holding inventory where the company can keep everything that is expected to be sold.
The merchandise inventory is an important asset for an e-commerce business. This inventory and the products used here are also accounted for in the balance sheet at the end of the year when everything is accounted for.
In this inventory, you will find products meant to be sold to the customer, products in transit from the supplier, raw materials that will be used in the making of the products, and products that need to be sent to the distribution centers.
Part 2. What Does Merchandise Inventory Include?
A range of products are present in the merchandise inventory. You will find products that are intended to be sold to the products. Here, you will also find the price-paid products or the products that are on the shipping list and have their costs paid. You will also find the products that are present for packaging or insurance. Hence, this means that you will find every product that you need to have for the process of making a product or the products that need to be sold.
Part 3. Merchandise Inventory Examples
There are many different examples of merchandising inventory. The first example can be a furniture store. They get desks that will be sold directly to the customers. The same store also gets computers that will be used by the employees. However, in this case, the desks are characterized as inventory, while computers are fixed assets.
Another example of merchandise inventory can be a distributor. A company purchases a motherboard, which it will sell to a computer manufacturer at a better price. Even though motherboards are not a final product and are used as raw materials to make other things, the company will still consider them merchandise inventory because it is selling this product to other companies.
Part 4: How to Calculate Merchandise Inventory
Now that you know what merchandise inventory is, the things present, and the examples, are you curious to know how to calculate it? Below, we have mentioned the steps that YOH can follow to calculate and figure out the value of your merchandise inventory.
Gather all the Data
The first and most important thing is gathering the data. This data will show the costs of the goods sold and also the amount of the inventory purchased. In most cases, this information is present in the file and even on the balance sheet. You can even search for it under the COGS section.
Understanding the Beginning Merchandise Inventory
The calculated data can help you determine the beginning of the merchandise inventory. This calculation can easily help you calculate the beginning of the merchandise inventory at the beginning of the accounting period. Below, we have mentioned the formula through which you can calculate the beginning merchandise inventory.
Beginning inventory = (ending inventory + COGS) – purchased inventory
Perform the Merchandise Inventory Calculation
The next step is to calculate the merchandise inventory. After getting the beginning inventory amount, you can add it to the merchandise inventory formula. This will show you the amount of the company inventory without the costs of the goods that are being sold during the same period. Below, we have mentioned the formula that you can use.
Merchandise inventory = (beginning inventory + purchased inventory) – COGS
Example of Calculating Merchandise Inventory
We have mentioned an example to help you better understand the merchandise inventory.
A pillow company wants to check its merchandise inventory at the end of the accounting period. During this time, the company was able to sell about 14,000 pillows at the cost of $20. The purchased goods are about 650, while there are 500 products in the stock. Then, the accountant gets more information, in which the costs of the goods sold are $280,000, the purchased inventory is $13,000, and the ending inventory costs around $10,000.
If we put this information in the formula, then the amount determined will be.
Beginning inventory = ($10,000 + $280,000) – $13,000 = $277,000
Now, putting the beginning inventory in the formula for merchandise inventory will give us the following:
Merchandise inventory = ($277,000 + $13,000) – $280,000 = $10,000
Hence, the total amount of the merchandise inventory is about $10,000.
Part 5. Merchandise Inventory Important in Accounting
Merchandise inventory is a vital element in a business’s accounting. It specifically represents all the physical products that a company holds for resale or to be sold directly to customers. Businesses need to properly manage their merchandise inventory so that they can keep an account of their sales, as it can affect the company’s financial health and efficiency.
Shows the Financial Health
The first thing that the merchandise inventory shows is the financial health of the company. It also plays a crucial role in determining the liquidity of the company. With the help of a tracking system of the merchandise inventory, you can understand how well the company is working and if it will be able to meet its short-term obligations. If the inventory is overstocked, it will also be an indication that the company might have cash flow issues or they are not able to meet the sales properly.
Affects the Cost of Goods Sold
The value of products present in the merchandise inventory also affects the COGS. This is one of the key factors that will determine the company’s gross profit. Hence, at the end of the accounting period, all the unsold items in the inventory become part of the closing inventory, and this will reduce the COGS.
Effects the Taxes
The number of products in the merchandise inventory will also impact the taxes. For example, during a period of inflation, if there are more products in the inventory, you will pay more taxes. Hence, you have to be very careful when evaluating the inventory so that you don’t have to spend a lot of taxes.
Helps to Make Informed Decisions
The merchandise inventory contains everything used in the company. This means that if you know the items and values of the products present in the inventory, you will be able to make informed decisions. You will learn the raw materials present, the number of products that need to be sold, and other things. This reduces the chances of understocking or overstocking, which can also impact the business.
Make Inventory Management Easier with NextSmartShip
Inventory is a huge part of a business and managing it can be very challenging. There are so many different aspects that you need to keep in mind when it comes to inventory. From the products that you need to purchase to the products that need to be sold, everything needs to be accounted for properly. This is why getting a helping hand can be very beneficial. This is where NextSmartShip comes into action.
They can help manage all the different activities that happen in the inventory and help you keep track of everything. They will manage the inventory perfectly while assuring nothing is under or overstocked.
Hence, this can have an amazing effect on the business. This will also allow you to focus on other aspects of the business while NextSmartShip handles the inventory management
Final Words
When it comes to business, there are a lot of different aspects that you need to take into account, and one of them is inventory. Merchandise inventory is the inventory where everything is present, such as the products that need to be sold to the customers, raw materials, and other things. This inventory shows the overall value of the business. This is why it plays a crucial role in the industry. We hope this article was beneficial for you and that you now know everything related to merchandise inventory. Also, make sure to check out NextSmartShip, as they can be your perfect inventory partner.
