What is Merchandise Inventory and Why Do You Need It?

Virginia Miller

May 30, 2024

In this article

If you're like most business owners, then you're always looking for ways to cut costs and streamline your operations. One area that many small businesses overlook is their merchandise inventory. But what is merchandise inventory, and why do you need it? In this blog post, we'll explore those questions and more. So read on to learn more about the importance of maintaining a healthy inventory!

What is Merchandise Inventory and Why is it Important?

Merchandise inventory refers to the raw materials, work-in-progress goods, and finished products that a company holds in stock for the purpose of selling. Properly accounting for merchandise inventory is crucial for businesses to accurately track assets, ensure financial reporting is correct, and efficiently manage sales operations.

Importance of Merchandise Inventory Accounting

Merchandise inventory is considered a current asset on the balance sheet. Inaccurate inventory accounting can negatively impact a company's reported asset value and overall financial health. By closely monitoring inventory, businesses can optimize cash flow, prevent overstock or stock-outs, and ensure they have enough supply to meet customer demand.

How to Calculate Inventory Value

There are a few common methods to valuate merchandise inventory:

FIFO Method

The FIFO (First In, First Out) method assumes that the oldest inventory items are sold first. Inventory value is based on the cost of the earliest acquired goods.

LIFO Method

The LIFO (Last In, First Out) method bases inventory value on the cost of the most recently acquired items, assuming they are sold first.

Weighted Average Method

With the weighted average method, the average cost of all inventory items on-hand is calculated based on total quantity and value. This average cost is used to determine inventory value.

Conclusion

Careful merchandise inventory accounting provides vital insight into the financial position and operational efficiency of a business. While managing inventory can be complex, especially for small ecommerce businesses, third-party logistics (3PL) providers like Simpl offer inventory and order fulfillment services to simplify operations. Their expertise allows online sellers to focus on running their business while ensuring inventory is accurately tracked.

‍

FAQs

What is merchandise inventory?

Merchandise inventory encompasses the raw materials, works-in-progress, and finished product items that a business holds in stock for the purpose of selling to customers.

Why is proper inventory accounting important?

Accurate inventory accounting helps businesses optimize cash flow, prevent overstocking or stock-outs, ensure financial reporting is correct, and have enough supply to meet customer demand.

What are the most common inventory valuation methods?

Common inventory valuation methods include FIFO (first in, first out), LIFO (last in, first out), and the weighted average cost method. Each calculates inventory value differently based on cost of units sold.

How can inventory management benefit my ecommerce business?

Proper inventory management helps ecommerce businesses avoid losing sales from stock-outs, reduce carrying costs from overstock, fulfill orders efficiently, and maintain levels to match consumer demand.

Does inventory management have to be complicated?

Third-party logistics (3PL) providers can handle the complexity of inventory management on behalf of ecommerce businesses. This allows online sellers to focus on running their business.

What does a 3PL like Simpl do?

Simpl is a 3PL that offers end-to-end solutions for ecommerce inventory management and order fulfillment. This includes warehouse storage, inventory tracking, shipping logistics, and more.

How can I learn more about Simpl's services?

Contact the Simpl team today to learn about their customizable solutions for simplified inventory management tailored to your online retail business.

‍