DEPARTMENT STORE
‘ ACCOUNTING

THESIS PUB TH! DEGREE OF A. M.

, Hans Melvin Vixie

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EPARTMENT STORE ACCOUNTING

A study of accounting systems employed
by selected department stores
in

Lansing, Michigan
and

Chattanooga, Tennessee

Thesis I‘or Degree of A. M.

113118 Melvin 1%?

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Author's Preface

Because of the extremely keen competition existing
in modern business, only those who practice scientific methods
can‘oope to survive in the conflict. Fvery boom and depression
period leaves in its wake the wreckage of large numbers of bus-
iness Ventures which were unprepared to compete in the strug-
gle. These failures are of two kinds. Either there has been
a lack of the instruments necessary to the conduct of a suc-
cessful business or the knowledge hrs been lacking of how to
coordinate properly the instruments in hand. Whatever the sit-
uation happens to be, fail“re follows sooner or later.

Department stores in general have come to appreciate
the importance of a thorough understanding of business prin-
ciples and shape their polices so as not to take undue risks.

As a basis for the writing of this Thesis, the author
made a survey of the accounting systems of the A.N.Arbough
Department Store, the Lansing Dry Goods Company and the Peoples
Store, all of Lansing Michigan. Also the Miller Brothers De-
partment store and the B.D. Loveman Company of Chattanooga
Tennessee. The management in these stores showed every cour-
tesy and cooperated in every wav by giving information which
made the work a delight.

The author also has clearly in mind the contributions

made directly and indirectly, by instructors of both the major

10-1313

and minor departments. However, special mention is due Pro-
fessor E.A. Gee who personally supervised this writing, and
Dr. H.3.Patton Who has made. many valuable suggestions and
corrections. And to close this section I pay tribute to my
Wife who has valued that for which this thesis stnnds more
than the finer comforts and personal ends so much desired

by everyone
H.N.Vixie

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Chapter

II

III

IV

CONTENTS

Accounting, A means of ieasuring and...........1
Controlling the fierchandising Enter-

prise - Lack of exact knowledge in

nany businesses - Large rergers re-

ouire accounting as a reins of con-

trol - Two aims of accounting.

Department Store Accounting....................l4
Ferns and Records - Historical

develOpment - Organization - Some

problems stated - methods of buying -

handling invoices - Purchase register -

Bales - Stock control - Cash register -

Sales classified - Case Studies.

Derartuent Store Ascounting....................33
The Statements - Nature of particular

accounts must be clear - Need for a bus-

iness gage - Supplementary reports often
necessary - The classified Balance Sheet -
Operating Statements - Graphic Statements.

Department Store Accounting....................48
The Inventory - Inventory an important

asset - Difficulty of Knowing exact trend -
Perpetual Inventory - Physical Inventory -

Retail Method - It places emphasis upon
sales-mark-ups or mark-downs facilitated

by retail method - Advantages of retail

method summarized.

CH :LPTER 1

Accounting, A Means of Measuring and Controlling

the Merchandising Enterprise

It is not at all uncommon to read reports in the
public press concerning the failure of this or that bus-
iness venture, in which the point stands out that only
the close work of a trained accountant revealed the act-
ual standing of the business financially. The frequency
of such statements naturally suggests a causal connect-
ion between sound accounting practice and business solvency.

The head of the manufacturing department of a large
consolidation once remarked that prior to the consolidation
he used to marvel that his competitors could quote prices
so much lower than he could. But after the consolidation
he discovered that many of the contracts had been taken at
actual losses. The only redeeming feature was to be found
in the fact that other contracts carried unusually wide
margins which saved the firms from inevitable bankruptcy.
The keen competition, found in every industry, which tends
to bring selling prices down to approximate the cost of
production unquestionably indicates the need of a system
of accounting which will insure a narrow, but sure mar-

gin of profit from every line undertaken.

The buying public will settle upon such an institution
as a source for supplying their needs, and the fact that
an institution measures its profits by the utilities adi-
ei, will make for confidence and stability on the part of
its custhers, and ultinate success to the institution.

All social organizations are dynamic, not static.
Our economic order has seen decided departures from the old
accepted standards. Not nany years ago our government, as
well as the people at large, frowned upon large industrial
combinations as being anti-social and contrary to the best
interests and welfare of the peonle. They did not distin-
guish between monopolies and big business. The Sherman
Anti-Trust Act of 1890 was designed especially to break up
and prevent such c0mbinations. But we have had a change of
heart. While we are not inclined toward monOpolies, we in-
vite the benefits which may and should c0me from employing
the economies made possible in big business. We desire
competition within a given industry, but not to the ex-
tent of lowering efficiency. Eecause of the evolution of
these economic forces the sole proprietor is coning to be
more ani :ore an exception, while the corporation is stead-
ily taking its place.‘:a

With the advent of the corporate form of business
enterprise, capital is beCOming increasingly centralized.

Large mergers have taken place which have brought millions,

Cu
and in case of the American elerhone and Telegraph Company

a capitalization of about four billion dollars, under one

management.

In such institutions it is beyond the power of the
most intelligent business manager to supervise and direct per-
sonally the many and varied processes being carried on under
his control. His task is rather to co-ordinate the work of
the body of picked men, all specialists in their respective
lines, who are responsible for the varied activities.3
With this relation existing between the manager of the
enterprise and the men of responsibility working under him,
and the manager and the stock holders, some means of control
must be found. Modern accountancy is the answer to this need.

Accounting has two major and general aims. These
aims are to measure accomplishments or results, and to furnish
the basis for executive control.4 In the past the science
of accounting has seemingly been contented to rest with the
accomplishment of this first aim. But as scientific
management finds its application in business the second aim
and phase of accounting must be realized in order to
secure maximum results.. It is not the intention of the
author to convey the thought that the science of management
has undergone a revolution. It iszrather the trend of
current works on accounting to stress accounting as a means
of o>ntrol. This act of drawing into action a most powerful
instrument for the systematic analysis of the problems of
management is seen to hold in store great promises. It is the
means of conveying to the chief executive the information

which he needs in order to guide intelligently the affairs

of the business.

Accounting in terms of results is necessary in order
to know whether or not that which has been done is in keep—
ing with expectations. This phase ends with the measurement
of the accomplished fact. It is a record of the hits and
misses which have taken place during a given period of time.

The information obtained from financial reports in-
dicates, first’additions of new capital which is one of the
fundamental conditions of economic progress. Capital is
drawn in the direction of greatest remuneration, and such
reports then become the guides to the flow of capital and
serve as the bases for investments. Likewise those who
have already invested in a given business look to the per-
iodic reports for information. Such information might lead
an investor to buy additional shares, or it might lead him I
to sell the amount already held. Closely related to the
investment phase is the element of securing credit. While
the credit banker should do a certain amount of forecasting,
his greatest becurity seemingly rests upon investing in bus-
inesses having a safe and sound ratio between assets and
equities other than capital. It is this principle which
leads banks and other institutions to publish their state-
ments so that they may be available to the public at large.
Such credit rating is built up over a period of years, and
is an important element in the progress of any business.

The government also has become increasingly inter-

ested in the operations of business.

 

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The income tax law of 1915 with its subsequent mod-
ifications requires the filing of returns by all business
organizations which are not specifically exempt. In a ma-
Jority of cases the government takes the liberty of pres-
cribing the fbrms to be used, and such reports are purely
accounting reports. An important element in connection
'ith these forms is the uniformity which it injects into
the keeping of accounts. It permits of no personal lean-
ings of this or that accountant and should serve as a val-
uable unifying factor. Another valuable feature of this
law is the compulsory filing of the return, which makes the
keeping of records imperative. The lack of progress in ac-
counting, especially in the small business enterprises, has
been due not so much to the lack of available scientific in-
formation concerning accounting methods as it has been due
to indifference on the part of the proprietor. This require-
ment then should prove a blessing in disguise, and should do
much toward the promotion of sound business tactics.3

In a large department store each department head is
an executive. He is clothed with certain authority and is
charged with certain responsibilities. Suchruen are select-
ed because of special qualities or accomplishments and are
given great liberties in directing the affairs in their in-
dividual department. But in connection with such freedom
rests a double responsibility of making good. An execut-
ive in connection with a great corporation in a recent ad-

dress seid that he did not expect his men to hit things

right every time, but stated that he expected their right
decisions to be in the majority. This statement emphasizes
the importance of a system of accounts so that responsibility
may be placed at the proper door. In the presence of certain
standards then theperson would st nd or fall according to
his own merit. .

The system of measurement which accounting brings
about is further valuable because it reduces waste. Even
the most careful spender among us would be astonished at
his spendings would he but keep strict count. A farmer
when selling his grain does not step into the bin with a
scoop and proceed to transfer say fifty bushels into some-
one's wagon, Just by guess. There must be careful measure-
ment or one or the other is very likely to lose in the deal.
The Cities Service Company realizes the wastefulness of
guessing and is urcing the necessity of budgeting upon the
American family. The budget is merely distributing our ex-
penditures by measure rather than by guess.

in ; report published in 1921 by the Federated Amer-
ican Engineering Societies brought to the attention of both
the industrial and social world the extent to which waste
existed. These reports specifically pointed out the extent
to which industry and society as a whole were responsible
for such waste. The survey made public reported the waste
to be approximately 49% and chargeable to poor management.
The proper direction, control, and coordination of the var-
ious activities of a business are the only means of elimin-
ating and reducing its wastes. This is accomplished by pro-

perly organizing the activities of thc business along fund-

 

n h; EEIIJE -

amentally sound lines which include functionalization, de-
artmentnlization, centralization of executive control,
proper balance of factors, provision for adequate records
and statistics. The social and economic development of
the nation is hampered by the waste of human energy and
material resources. In view of the fact that most of this
waste can be eliminated, it is the duty of industrial lead-.
ers and executives to organize and operate business to bring
atout the utmost utilization of the available productive
facilities and thereby increase human welfare.

It is therefore highly important that there should
be constructed in every business institution a system of
standards and measurements in accordance with the aims and
ends sought. As every important operation in a fully or-
ganized business normally has a responsible functional of-
ficer in charge, the reports covering depnrtments should
be built around such an officer and made to reflect the
complete standing of the particular department.

Because of the great number of variables, the con-
trolling/ggaggcounting would seem to offer the greatest
challenge. Along this line scientific management must
wrestle in an attempt to reduce the number of variables
and bring the predictive element upon a sound basis.

This prognostic feature is at once recognized as the pre-
rogative of management, and with the two factors above
brought together, the result would be scientific manage-
ment. If accounting is ever to serve its highest purpose
it should be of definite assistvnce to the executive body

in the control of the business enterprise. But in order

for the accounting system to render service commensurate

with its potentiality the system must be properly designed.

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to be useful to the greatest degree to the captain of the
business ship.

The control phase of accounting can no longer be lim-
ited to financial reports. It must exhibit phvsical as well
as value facts, both of which are needed hv the manager.

The accountant's responsibility then is that of delivering
his service in such form as to be useful as statistics to
the business executive. In this respect the service of the
accountant is similar to goods sold by a given organization,
the quality of which may be the best, but unless the service
of handling orders and delivering such orders is well taken
care of business contacts cannot be satisfactory.

'The viewpoint of the accountant should always be
that of the proprietor or executive, and the value of the.
service he may render an organization is largely dependent
upon the breadth of his viewpoint. In this respect a close
co-operation between the management and the accounting force
is essential to the development of an efficient accounting
service. They must see in terms of ea~h other. The under-
taking must be a joint effort, because the responsibility

rests jointly upon these two forces.‘

In the control and coordination of the activities
of a business, records and statistics play a vital part.

But it is not enough that we stress the importance of sup-

plying complete and usable information on the part of the
accounting force. Such information would be of little im-
portance unless the business managers appreciate its poten-
tial value. And, unless the accounting information which
is supplied is used, the very fact of its completeness
would add to its wastefulness. Every department store is
bidding for business, and it would seem that this compet-
itive urge would lead the really prOgressive executive to
develop his knowledge to the extent that he would be a mas-
ter of such important instruments.

In a business enterprise of considerable size the
chief executive does not find time to attend to particular
details. With the growth of the Yusiness he was obliged to
delegate certain functions to men who were especially qual-
ified to discharge such functions. Control is the attribute
of the chief, and he delegates such powers to other men whom
he appoints to fill his place when the occasion demands it.
Such men serve as his second self, and act for him. 50 long
as the business is small, he may direct the various lines
personally, and it is to be expected that he would direct
them uniformly and without favoritism. With this function
distributed among a number of men, who have diverging inter-
ests, harmony is not always assured, and such interests must
converge in the manager-in-chief. It now becomes his work to
harmonize and unify the interests of these men under his sup-

ervision, so that the greatest results may be realized. The

10

information which enables him to give wise direction is sup-
plied by the controller fron the accounting department, which
is equally interested in all departments and is therefore a
fair source of information. One department store of which
the author made a survey, carried forty departments, and the
work of co-ordinating such an extensive enterprise presents
no small task. i

It is the external side of any bus ness which presents
the perplexing problems. It is on the outside that a business
encounters many independent and antagonistic influences. Such
problems may be in the form of competing enterprises airing at
their destruction in order to clear the field of competition,
or it may be the conditions of business in general which are
antagonistic to the future welfare of the business. Regardless
of its nature these are exterior forces over which an evecutive
has no control. The solution lies in understanding these forc-
es so thorouohly that he can manipulate the controllable in-
terior factors so as to realize a desired result. It then be-
comes largely a matter of matching the skill of one executive
against that of miother and the executive should have scient-
ific knowledgeboth of his own business and of the economic
situation in general.

We shall next consider the instruments or tools by

means of which he seeks to bring about satisfactory business
relations. These instruments are the intellectual processes
or analysis and synthesis.5 Duringthe developing years of our
industrial society, the point of competition was between the
factory system and the home hand worker. This was no com-

petition at all to the factory menaser and he practically

 

TH

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ignored it amidst his eagerness of forging ahead. His mar-
gin of profit was wide and he had no cause for concern. But
as the point of competition changed to those of his own stand-
ing it became necessary to employ the instrument of analysis.
If profits were not earned, why were they not earned? This
last element has not superseded or removed the former. Com-
petitive business must employ both these in their proper re-
lations or ratios.

The keen business executive will analyse the business
trends in order to discover the elements that act upon such
data and will seek to find the cause for such action. The
extent to which he is ahle to point out these causes will
measure the effectiveness of the solution proposed. A pro-
per understanding of the term synthesis will make it clear
that it cannot be Dpplied in the past tense. Its meaning
lies only in the present tense. It is the act of combining
and this act assumes a plan in the present perfect tense.

The instrument of analysis on the other hand is a tool oper-
ating in all tenses. The executive analyses the past and ob-
serves certain causes. Again he analyses the present and ob-
serves certain trends. He then predicts what the outcome of
these trends will be, and sets about by’means of synthesis

to build his business to take advantage of the observations
made.

To sum the arguments of this chapter then we restate
that the tendency toward mergers and big business makes an

effective accounting system a necessity. The accounting

service is divided into two major functions. The first

is the measurement of the quantitative elements and indicates
progress or retardation during a given period. The second
function: is the interpretation which the trained accountant
gives to the physical and value facts which makes them immed-

iately useful to the manager.

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l4

CHAPTEF II

Department Store Accounting

Forms - — Records

The department store usually finds its origin in the
general store. It is a combination of a number of departments
or stores located under one roof and under one management. To
the various department heads are delegated duties in connection
with the buying and selling of nerchandise and to a limited ex-
tent its displays and advertising schedules. Dossibly one fac—
tor which has aided in the deveIOpment of the department store
is the trend of accounting to the end of keeting accurate re—
cords with specific classes of goods. A merchant operating a
general store would naturally desire to know whether his stoves
had been profitable during a given period and this would tend
toward segreration.

There are many problems that arise with the buying of
merchandise for the purpose of selling. The first question to
ask is: What does the public want? It-is evident that there
are many commodities Which never reach the narket. They do
not pass the initial test. But this is not so serious as it
Would be to have them find their way to the market and later
be rejected by the public.

The incident is related of a well known chair store
promoter who while visiting one of his stores, learned

that a certain line of neckties Was

not moving. H« thereuoon ste oed out in front of his store

observing the nessersby. In a half hour he returned to the

store and airei that the ties be out aside beo use they were
not What tie neoole used. Ztyles are constantly
the well versed buyers keep one st=p ahead of the public.

Site the reduction of inventories the purchasing
problen has diminished considerably. Seasonal buying is
largely a thing of the nae . Eucn is monthly buying and
many items are purchased on a bi-weekly basis. The above
items :ertain to chan ire con odities. Again certain lines
such as linens, underwear, handaerchiefs and the like are
ordered six months ahead.

While the style Changes are subtle and uncertain,
there are other risks which come about because of seasonal
variations. A store may buy a nornal supoly of footwear, but
because of unusual climatic conditions the line say not move
at all or the supply may fall far short. The buyer may secure
a normal suonly of rain coats and unbrellas. The se son night
chance to be unusually dry and the stock would be left on
their hands. Serious as EJSSC problems may be, the risk is
greatly nitiiated by fr=cuent buying and in much snaller

.p
.L

Quantities. Anotner bases 0 buying is one that is always

in

present. Buying must be done at orice whiCh will enable
the store to sell at a orofit. In a highly conoetitive field
great stress is olaced uoon buying because the sales orice

must be as low as possible. It is here that skill in business

managetent is rewaroed. In order to Meet this con;etition,

a detailed stock record should be keot.

16
Je shall conside ourcnesing as our first step ard
shall describe the systeh in detail. The nurcnsse recuest

Q
\

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should originate Vite t

e

'—
p...

(

.tock pan, waste a stock room is
keot, or vitn the denartnents, The revuest should sass over
the perpetual inventory desk for a check and then sass on to
the purchase deoart ent. The ourcna e order is Lads out in
triplicate. The first cosy qoes to the vendor, the second
goes to the receiving deoartnent, and the third form is
retained in the orier file. In a large business it is Well to
have the purchase orders made out in different colors and
marked to indicate degrees of uryency. In this may a rush
order would have soecial attention? All purchase orders should
be by deoartnerts and any one order should never reoresent more
than one desert ent. Tnis is very inoortant as it sages
poSsible a co olete seoaration of freiynt and exoress cgarges
by de artnents and siaolifies the handling of such itens
on the cooks.. The ourchase order should be .ade out carefully
so as to give conolete infornation. Tue deosrtnent for which
the goods are ordered should be indicated and many stores refuse
1"
to acknowledre the invoice unless the deoartnent is indicated.
As tie zoods srrive at the receiving room they are
checked on the form nrenared nhicn we shall term the invoice
anron. This aoron is attacned to the invoice and gives all the
infornation in connection with receiving and billing of goods.
Such information covers the nork of four steps or divisions--

the order deoartment, toe receiv'ng room, the harxin; roon and

“I

finally passes on to the accounting deoarthent. In tJB account-
ing departnent the invoice is entered in the ourCnase “c ister.

‘ " d. .- ‘<.-.“ .. \ _ ,A
.. VV‘IH- u.‘ H-” n -~U:— I./

PURCHASE GRUB?

‘1’?

 

l 2 3 4 5 d 7 Q

9 13 11 12 15 14 15 16 17 18 19 A B C D E

 

 

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No L
Date
Please Ship to
quantity Description Discount Net Ship Date
Route Via ”arms
Miller Mercantile Co.
Pur. Agent
Form 9

From Bennett

 

18

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 15, 1989
LAFK'S NQVELTY SHOE CO.
Sold to Terns
in
I q
3 (Form 10) E; H
s: t
if
APEON PAQTFD Io INVOICE g; H
By Courtesy of A.N. Arbough Co.
INVOICE APRON
ORDER CLERK RECEIVING ROOM ’ MARKING ROOM 1 OFFICE
Invoice No. Date Received Date Received Cost Invoice
Checked Cost
Dep't. No. Carrying Charges Cuettity Checked Fetail Fig- wage,
Fy ured Ey Pet'd.
I
Qrder ho. Date Checked Tieret Attached Peteil Invoice
Checxei By By Cr'd.Ey Cost
Date Due Over-short Rechecked by Date to De- Reviewed Dis-
l7 rdrtrent By cuunt :2
Late Checked l Antici-
Frsm Order i reticn_¥
No. Sheets E Buyer's O. K. Date Net
5 Posted Feteil

 

 

 

 

 

(Form 11)

19

It now has the buyers O.K. for cuality and other particulars.
In a large store where many invoices are received, systeratic
handling of such invoices must be nade possible. When invoices
are received in advance of the goods they are placed in a file
until the goods arrive, when the routine descrited above is carried
out. As the invoices arrive from the rarring room they are enter-
ed in the rurchase register as indicated and filed anon; the
unraid invoices, which should be by firms, always placing the
new invoices to the back.

Cuite often it is necessary to return sons of the items
on a given invoice. In such events proper detit nedcranda
nust be grepared. In this Case one should nake sure that all
terns and dating are adjusted to the invoice so that n; discount
loss will occur when the hill is raid. Care must te exercised
also that the business does not stand the carriage charges. Ey
referring to the invoice apron it will be seen that the retail
extensions and footings are warned as well as the cost extensions
and footings. It is also well to have such retail extensions
marred in red ink. This is a safeguard against paying the retail
price instead of the invoice price. After the invoice has been
entered on the Purchase Feccrd the page and line thereof should be
marked on the invoice in order to facilitate quick turning in case
it is desired.

In returning goods as indicated shove the debit
menorandun is rretared in triplicate. The original is sent to
the vendor. The second carrying only debit memoran um number

is retained in the pad. The third is attacned to the invoice

and is Landled as a credit senorandun when entry is made in

26

 

 

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Form 12

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ages

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RECEIVING REPORT

21

 

Rec'd. From-
Via

No

 

Uate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Checked By mime Recld‘
Car No. Charges
Placed .l Released
Our Order No. Requisition No.
uangity Description Wt. Remarks
Checked to Inv
clerk
Form,13

From Bennett

 

WEBIT MEMORAHDUM

 

 

 

 

 

 

 

 

No hr “ate
Your A/c Debited $ _a as shown below
Date Am't

 

 

 

 

 

 

 

 

Form 14

 

2
the Purcnase Record.

We snail next describe the Purchase Fecord illustrated

*bove. In discnssing the invoice apron me n ted that this

pt

apron furnishes detailed information which enables the ledger
clerk to dare the proter entry. As the illustrative form
shows, provision is nade for considerable data. The first
thing to be noted is that the Purchase Register is divided into
'sections, and gives one to each department. In thisz:egister
both entry date and invoice date are given. The time allowance
or discount period is readily ascertained and as the entries
are progressive this register may be used as a basis for making
out checks. As the date paid is stamned a complete record is
obtained. The total of invoices would give the figures for
purchases and the sane amount would show the credit to
Accounts Pa a‘le Control. A ain as the invoices are raid

the credit is to Cash and the debit is to the Controlling
Account Payable. SOne eh: rprises do not think it worth

while carrying ledger accounts with the creditors but it

would seem that no rule can he laid down in this respect.

The Purchase Register illustrated does not rrovide for a
c0nrarison among vari us derartments. This conrarison would
seem to offer nany advantages and is provided in the form

of a daily summary of all the departments in the store. The
percentages would be worked out on the basis of capital
emtloyed, sales and net gain. A comparative statement would
stimulate rivalry and should asks for efficiency. It not

only gives total sales by departments, but by sales peonle

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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for the day and month. This summary may also serve as a basis
for determining increases in wages. On the other hand it will
show whether or not a clerk is profitable.

Thus far we have not studied the operations of the mark-
ing room and it would be well to observe what takes place there.
After the merchandise has been inspected by the department head
and has been accepted, provision should be made for marking
every item which passes through the room.' As many losses occur
from not knowing the cost of merchandise, the plan is to have
both cost and retail price marked on each item. The cost should
be marked in code. "or this purpose two Five letter words may
be used. Each letter would correspond to a given digit from
one to ten. A historical record should be kept of code and
shouhibe changed at least once a year. The per cent of marks
up should be based on the rate of turnover. If the management
has decided upon, say thirty-six per cent, as the necessary
mark—up, thirty-six per cent would have to be added where only
one turnover is made in a year. There the turnover is rapid
the percentage is arrived at by dividing +he planned percent-
age mark-up by the number of turnovers. For example, assume
that in a given department four turnovers are made in a year.
The planned mark-up of thirty-six per cent would be divided
by four and would give the necessary mark-up of nine per cent.
The important thing is that the segregate of all mark-ups cor-
responds to the thirty-six per cent planned. 7"

Sales are of two kinds-~the cash sale and the credit
sale. With the many features included on our modern cash
registers it is not necessary for the salesperson to make

out the cash sales ticket. An upsto-date cash register is so

1" «V

- guys; .4.—

1v 3 Page 30

27

constructed, that the cesdicr is sole to tring out the
necessary infirnation by "ressing certain keys on tie macdine.
The inforixtion desired is the particular dewnrtient t1
clerk number, transaction number, the date, and amount of the
sale. This infornation is retained on the mscuine in 3'
'cumul tive form 73d may be totalled at will.
“I!

2Th€ credit sales involv .ore detTil: After the
sale has been made it is necessary for the clerk to interview
the credit mane er. The sales ticret is made out by hand

and aives tne nane and a: ress, the a ount 0: tie sale. Tne

anount of the n.y eat is tnen credited to offset the sale.
Other iiforz tion conta'ned on the sTlesticket is the

department nunber, clerk number, and date. 28 on clerc is

provided with a and of sales tickets and SID ld nev;r be

fl

e sad or another and should also be

)

permitted to use t1

5.

recuired to account for evzry ticket. Sales tickets are

sales. In case

()4

used for no other ouroose mien to recor
of returned sales a Merchandise Returned Blip should be
precsred in duolicate to reolace such goods in stock. On
the back inside cover is a telly card which the clerk is
recuired to fill out. Tne entrie s on this ce‘d must agree
titL the total anount on the slips passed in. “nether form
is necessary to record payments made by custOners. This

record should be so made tnat it is imiossitle to overlook

(D
O

posting the amount to the credit or tn usto er. A controll-
ing account should be maintained in the Gener1l LeQ er so as to
have a means of checking against the oersonal leQ me In order

to assure a ready audit, it is necessary at times to issue ioth

a chorge ticket and a Cash ticket. Eden €1c1:nh'n is sold

et a discount tie amount of the disco;nt should be written in
the lower left hand corner and circled. This is necessary

in order to avoid discreosncies in inventories. Often itens

are called for by customers whicn are not carried in stock.

If theye r the line handled, every effort should be ends to

obtain them. The advisability of stocking tie item should be

considered. Care must be exercised however as it may be false
dens.nd created orior to the call of a sale snan carryin3. such

.. a 3

The modern cash re3ister is of improved design and
is a decided convenience and safety measure. The register
is enotied at the close of eocn day and the money on hand is
placed in the safe. At the es innir 2 of tge dsy an amount
sufficien for the purnose of making 0 ange is transferred
from the safe to toe register. A senorendun is left in
its place s0'as to leave the 0283 undisturbed. Tne amo;nt
taken to begin the dsy is subtracted fron the amount received

in oroe r to ascertain the tot—l C? en receiots for a given dsyfi=

The daily sales tickets are divide in to tWo ole. sees--
cash sales and sales on account. Tiese tick ts are tnen sorted

according to clerks under one or other of tie above headin s.

The information obte ined is entered on a daily Eu; 7IY Sheet.

'J
5.2
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Pl
C..-
O
H
(D
(3 .
H
('1

nis s;eet is IIGJ”1 so so es to ororide for Lot: Ciel

OJ

y totols for every sales oerson in the store. It indicates

the de>artments and slows tn:

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day. These daily sun-eries a:ain are afied to nine no a

monthly sumiary.

89

CASE'STLDIES

Case Study A

The stock requirements originate with the heads of
the various departments. This is especially true in regard to a
quality of goods, styles)et cetera. The department head must stay
within the capital allowance for his department.

As the department head is the functional officer for
his department all the'buying is done by him or by his direct-
ion. The Loveman Company as well as the Miller Brothers Store
of Chattanooga and A.N. Arbough's of Lansing, being privately
owned stores, reported that their buyers visited the New York
markets as often as twice a month. This is particularily true
of the buying of goods having frequent style changes. Again.
small orders may be mailed or telegraphed as often as twice
a week. On the other hand there is what is known as seasonal
buying. Such buying covers about six months. The privately
owned stores listed above reported such buying in connection
with underwear, some types of hosiery, linens, handkerchiefs,
blankets, et cetera. The trend however as stated hereafter is
toward short-period purchases, and the stock room is steadily

losing in importance.

30

Case Study B.

There are two general methods in handling credit.

The first is the regular credit eele where no down payment is
required, and the sale is made on an open book account. The
second plan usually requires a down payment of 10% and is
variously known as a contract aécount, chattel mortgage

sale or club plan. Under this last plan, the merchandise
may 5e repossessed by the store in case of a lapse in pay-
ments.

As a rule a person who wishes to obtain credit makes
his desire known before making the purchase. After the cus-
tomer has requested credit’the salesperson accompanies him
or her to the office of the credit manager where a number
of questions are asked. All stores may not use the same
degree of precaution but in the case of Loveman's departs
ment store no account is opened without bank reference and
a favorable report from the local credit association.

The credit manager with the Miller Brothers? Con~
pany reported a remarkably small number of lapses in pay-
ment due to careful investigation of the customer's stand-

ing before.credit is given.

Case Study C

Because of the keen competition existing everywhere,
stores must carry their leaders - goods on which the? have
secured an exceptionally low price. From time to time man-

ufacturers wish to close out and discontinue certain lines

31

and will quote such goods at very low prices so as to furniaw
special inducements to buyers. While the merchant in turn
plans to feature these goods as leaders, he may realize a
fair profit due to the low cost to him. On the other hand
store-managers and department heads are keenly alert to

what is going on in competing stores and are forced to take
a mark-down on certain goods in order to meet the prices of
other stores. In so doing the planned percentage of mark-up
is maintained with difficulty. In fact only an average can
be aimed at except where the Retail Method of Inventory is I
maintained where both cost and retail is indicated. It was
especially interesting to note the confidence which the men
of the Chattanooga stores manifested in connection with the

varying mark-ups and mark-downs.

E1188, Jfine-

Eiblic“rashy of Chancerll’

-- ~~«~ ‘t' .q' ‘0“ .‘1 . .‘ ' ‘- '(-. 4‘ f2
"“7n2¢e_nat iaiau_i accoints" Chapter c3

( v ‘. 'i ‘ ~ ,
L. "Account n" 3,3:

"Accounting Tgeory and PraCtioe” Vol.3- C aster 11

(T

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CHA??RR 2f:

department Store Accounting

The Statements

We next come to the step of preparing the accounting
information in a form that may be presented to the managerial
force. As stated previously the quality of the work of the
accountant is determined by the extent to which his reports
are useful to those who guide the affairs of the business.
Reports may be very simple, covering only single aspects of
a business Operation, or they new be very complex, dealing with
the enterprise as a whole or with several enterprises. Regard-
less of its simplicity of complexity, it must be designed to
convey to the managerial force all the information needed
for the purpose of control. In the matter of reporting it is
readily understood that the system must be designed for the
business in which it is to be used.

If the balance sheet of a particular business is
to set forth a full and correct picture, the indiviiual
investments and liabilities must appear and be correctly
described. Every account which represents a material element
of investment or liability should be set out in the balance
sheet. But it is not only important that items appear on the
balance sheet; There must be some means of evaluating such items.
To illustrate: John €mith a Company owes our business two
thousand dollars in the form of accounts receivable. We

have learned that their plant has been shut down because of

34

- n A x . .-.. a- a. A -. .- -.-.-_.— r": r~ .- ». — ‘- 4— 4- , ~ -. '

18 otnec Uy r_,;1)t._t_.~r concern. in: f ct t,;t tic >la t is closed
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m&n€S CDllGCulOflB WOIG pOuLuiu Que b Jnlt c: COJ3ldoreu 13

«a , ' -.- .m» -.---. ‘1 n G'n .. -1‘. '- .3 1‘ r3. 4- -~. ”' 4" '_\ . "i
2:91;, “.1; 4L: Lie aild‘wculce 1.3:? S --.C.l (LCLQULHL; ‘: . .Lll bill-:3 .1. 68:06:01:

J
y—aJ

tne rare lucx o: o;e business enterorise oeco es tie nor:
lucz or 0 here. Banning i;st tutions net- orten made slips

elon: ‘his line. Tie Florida icon and crisis in 1928 and

C'

19h9 is a good example. Bank thrived vita toe rest for some

(4‘)

time--n kin; loans and or course realizing oroiits tierefrom,

but w;en the crisis came, taey were awakened to the fact that
they had made loans on a given orooer; which was many times
the value of such orooerty in normal tines. The frequent
occugences of suci situations emphasize the importance on
the part of the accountant to prepare comparative statements
and graphs, not only for the given year but over a period

of years. In this respect the accounting infornetion serves

as a :usiness thereoneter, and we mi ht say barometer, as well.

J

As a boy the writer used to :elight in the pastime of watching
the fire en durin: tn~eshing time. There seemed to be no
limit to the anou t of straw or coal those en ines could burn,
but toe fireien usually keot one eye on the steam gauge. He
aired to keep the needle as'close to one hundred twenty pounds
as oossiole, but did not rant it to to beyond that point
because then the safety valve ooened and waste ensued. The
above illustration is sonennat analogous to business, we

want to hes: the "steam" at the too, but not to the extent

of soilling over. It is toe accountant who furnishes the

1

r r‘u A V V - -.* . . \ ', ,‘, I ’1 ’ 1.x a. . . —. -.l I. ,—
qeuge of Anion modern cusiness 1s coitrllled.

‘d

-4 ~ r ’ “I - '
.e 51 l n,. .:_n .

.. _ '. J-' a n. J y 4" :3

r) 1&1 es ' L-C51 U ---l .1 'CU A‘Ldr— 5* U - v
‘«e ~r‘ r“ f (j P. : v—r- ri; '; ._ ‘1‘- "j :‘ 1"p
LJ - .. . Ma.) Cu--'»~ ; LL ’ u p. Lo .4 ., - .4

data under two tr; i

our reporting-s

vorts accordin; will be fi

; ; ctual instru ants or
$- “ ‘5 . ' “1“- ‘ ~‘ A 'J.‘ --r.
on llfi. .flJCIl l-a;.funnfl1u8 nnty

w‘. ea

-iz’.

MCCQ VILAJU.

n
4
‘~_J

t6

.0;

.tUCi’l

I8 J 8 3f; t) #
accounts, anf o eret I{:;fl3‘1§?lfiL to no inel accounts. Tie
financial re art is issqed for tie 1 tlic, for stock nol

for the board'of dLrectors and f r tnase ego nave tgeir 1ands
directly on tLe t.ro:tle of the vutincss. Tle sthte ent issued
for public use is tost co-uonlv a synopsis of tge balances of

the re al accounts. But in or*

owners, inv 33313

.1
.L

item sh u d euoeer clot:

.94-

evaluation oiten reruire

CDHS

aulOn RAG ‘ :e EFTI‘TSBO as
‘ A I ' T‘._
l. F‘l.ll'fwe-Is-led.’~ r15- ‘3

Ca

".1 ‘
5-" .10
g, . In

;C

5. Ac
’1
M', ,- ‘Q 1.": fl.._.o..: - .9
1.15 Cycluv; D) ‘.‘U\...L O;
one-ati;, e o; a business,
but such iniornation is confin
the business. Sucn ooera;in

tactics mnicn

(r:

0’)

any busiqes

withheld fro; confetitors.

As the o

oiélete but

ier to be of

S-i€€t

uipnent

service to

any

oersons in any cata01ty, 6301

J-

true color. Tnis critical

lCS

‘_-_ ‘\
teriuie

euoole;” .entary inforn-

‘-

f

follows:

’-I‘u

Eeoorts

en Recuirenents
counts Receivaole
ventory Recuiienez
iIW3L3--
_I,

4"; ,_..
,. .ul-1~4—v

Rec:

.‘
1vr- .I
‘5

counts

which covers the

elould ce equally contlete,
ed strictly to t“e genegerc of

reveal uolicies, and

I"? i 3116 S

eratin

see in

MILLER HERCAHTILE COMPANY

Comparative Balance Sheet Jan. 1, 1929.

 

 

 

 

 

 

 

 

 

 

36

 

 

l\

'0

O O O O
CDNCI)

1-4
HUWQ
O O O
NO‘IP

,p
q
03

ll

(DUI

 

 

 

 

 

 

 

Fixed Assets 1928 e 1929
Land 0.0.0.0....OOOOOOOCO00......0625'000 21.3 ”’25,’)OO
BaildingSOOCIIOOOOOOOOOOOOOOIOU... 25,500 21.7 24,000
Office Equipment.................. 1,000 0.8 900
Delivery Equipment................ 5,500 5.? 2,827

Total Fixed Assets ........... A55,000 46.2_ 852,720

Current Assets

Inventories: .
Dry Goods ..................... &10,500 8.9 8 9,000
Furniture OOOOOOOOOOOOOOOOOOOOO 12.00:) 1(302 12,500
Groceries 00.000000000000000... 1.“,q’)? 8.5 Q’OOO
Total Inventories ............ “32,530 2V.V ”50,555
Notes Receivable ................ 525 0.4 500
Accounts Receivable.............. 27,000 25.0 15,980
Cash- OOOOOOOOOOOOOOOOOOOOOOO0. “1,353 1.]. 1,330
Total Current Assets.......... 51,575 52.4 48,280
Deferred Assets ':
Prepaid Insurance............... 5200 0.1 5500
Prepaid AdVertising............. 500 0.4 800
““‘37§5"‘575 "—7§1150
Total Assets..................e117,075 100.0 s102,1oo

Fixed Liabilities .

Mortgage Payable.............. e 20,ooo 17.0 * 20,000

Current Liabilities..............

N0t631)ayable 00.000.000.00... 6,075 5.2 1,000
Accounts PayableOOOOOOOOOOOOO. 30,000 25.6 14,980
Total Current Liehilities... * 56,075 50.8 s 15,980

Proprietorship

Miller Brothers ............. * 61,000 52.0 2 66,120

 

 

Total Liabilities and Prop. 8117.075 100.0

64.6

8102,100 100.0

100
131
102
103
134

200
201
20

333
305
306

307

300

502

400
431

éOB

404
405
406
407
408
409

Notes

'ichrtiri

" . . a .7 . ' .a
7.7.1111; L; 1“ r11; ‘1'. .10:

(T)
c+

Ass

Casi

B‘h’lk

mccivable

Accounts cctiv--l Control
Inventory

Liabilities

I.ote HP y ble
Cieditors' Ledger
Trade Checks
Taxes Accrued
Accrued Hares
A110tance for 513
AlloW nce for Detre
on uilcirgs

{U
H
O ([1-

on Purchases
‘arned

:5

(D

Ht) (1)
P '”
cf (1)

Sales Sal
Bonus
BLly 1 L10:

aries

-
.LY till.

U)

E:

(‘3

Delivery Exoense

Frcilnt and Ixoress
Depart ental Exoense

Departmental

Rent

Light Heat and
_. ’

Sunolies

Power

135
135
137
138

4" '1
411.6
"\ F
.1, Q

410
411
412
413
414
515
‘110
417

37

Buildings
Furniture
Delivery

Deici

l‘I‘EcL

Reserve for Deoreciation
on Furniture and Fixtures
Reserve for Depreciation

Delivery Ecuionent
Caoitel

on

Proorietors' Drawings
Accounts

’N -

our-lus

Profit and Loss

Dividends

Rent Earned

iiscellaneous

Taxes
General 3 xense
Insurance

3d inistration Salaries

Office Exoense
I‘e leonon e and Telegraph
Iilcdl'eSu

Deoreciation

‘ A ., ' - .'~.1 -\ . .5. —.fi . . ‘|“‘\ , V- .-. 1-, _ 1 A. . ’\ u I" ‘-’- V J-
IOI‘-11 OI q. ..'.')\7]__.; :JlCoLlie. lie v?,]-?..1'e-L; DADS-ta lb 9.1.310'HOLLS UO

.‘ ' w“ - " A I'. “ “ . ‘. F‘ A rs ‘ "" ‘ .'- m"
a SH&DSJOE. It ictires t-e ousiness or H fiven n03ent. rue

periods of the ofilence sleetfi. Tne oicture must inoicnte volume,

H ‘ q 1 ,L‘...,.... V , ., '_ 7. '. , '3 l _
conten ens extont. :ucn a st bfigznt ensue no: clan es cane

}.
C?
t
CF
0
.V
J
.74
D
I
f
D

1
r
O
k
(D
o

“._. 5 P. -4- .1 1,.
accit, enw th ”gr“ ”

R
Resorts
aeor Reoorts
T~oloyient Reports

TN inin; Reoorts

an.1c;:nt Rooorts

l) 3-Xoense 3e arts of Various Kinds

)
()
()
)1-
-’)
(3)"l€1J-
) L
()
()
)
(

A
.11“
F1

03 Reyes)

In the preoer etion of such a reoortinr system tn
accountant should se-k to ensver such questions as the
following: What are the ignortent relstionships betwee
grouos of iote in an bccouztin; re ort? Wh?t tyne of facts
or estimates should the xecutive a ttemit to e.educe from a
report? It hey accordinilr “e stated tgvt the executive finds
considereole sssistence in considering ousinees focts in terns
of "etios. Que .nt ite tive retios ire ignortsnt in e greet non
inst ncss.' TLCIG ie tee ratio of tne :verc e stoc: to total

. E r I“ u .C‘ .. ' .’\ ’_ . d. - .‘ J— “ —~r‘ 1 a‘ ‘ 1". _-\ r: . WV
$8.18 ; tile 1 blO OJ. 8511111;_ CK" J---k)\ b3 JUUbao-L CA 1...L QED, («Mum éufiJ-lj

such C‘LfiPIISOnS union nay oe gede titn benefit and orofit to

(\3

. ‘ F -\ .-.~ . —- ‘- c V“ 3- w -- w. “
tile ....:.118.¢__e...e.1t '31 t-.‘€ colt-711168

C0
0

Anotner inoortent relationship is found in consid—

' fl -. r I . —\ . r‘-, r "‘1 (‘1 ' ' . 7 1‘: ' I .1? ’4. —
erinq everotrs. tor cket»le, EVV fine 8 133 “Jelu ,1»0 More
x.) ‘

IILLE? MERCQHTILE'COMPAHY
Profit and Loss Atatement
January 1, 1929.
sales ...................................... 5160.000
Cost of Goods Sold

Inventory, 06c. 31, 1928........332,soo
Purchases.......................118,000

5150.500
Deduct Inventory 0ec. 31,1929 30,500 120,000

 

Gross Tradins margin....................... 40,000

Selling Expenses -
Salaries of sales Force.?l0,000
Advertisirg.............. 5,000
Uelivery Expense......... 4,000
06p. on Delivery Equip... 700
Sundry Selling Expenses.. 1,300 21,000

Net Trading Profit......................... 19,000

Administration Expenses
Management and OfFice Sal.6,000
Heat, Water, and Lights 800
Building Repairs......... 900
Building 0epreciation.... 1,500
Stationery fl Printing.... 200
oep'n. on Office Equip... 100
Insurance................ 1,700
Taxes.................... 2,000
Tel. and Telegraph....... 90 13 290

I‘Tet Operating ProfitOOOOOOOOOOOOOOOOOOOOOOO 5,71,.)
Financial Expenses

Interest Expense..........l,750

Sales 0iscount .......... 845 2,595
Vinanoial Income

Interest Income.......... 535

Discount Received........ 1 470 2,005

IIet Financial Coats...OOOOOOOOOOOOOOOOOOOO 590

Iret PrOfit.OOOCOOOOOOOCOOOOOOOOOOO0... #5'120

MILLER MERCANTILE COMPANY
Percentage 3rofit anfi Loss Statement

Year Hnflinv Dec. 51, 1929.

«a
C36§

3816800....0..OOOOOOIOOOOOOOOOOOOOOOO009.0... 1-\

q
J1

Cost Of GOOdS SOldOOOOOOOOOOOOOOOOOOOOOCIO...

Gross ”rading Herein......................... 25
3ellina Expenses 1

Salaries and Sales ........... 6.25
Advertising................... 5.15
0elivery Expense.............. 2.50
0ep'n. on 061. Equip.......... 0.44

Rundry telling Expenses....... 0.81 13.13

Net Trading Profit......................... 11.87

Aflministration Expenses
Meant. and Office Salaries..... 3.75
Heat, Water and Eirhts......... 0.50
Building Repairs............... 0.56
Allowance for 0ep'n............ 0.04
gtationery and Printing........ 0.15
Dep'n. on Office Equip..........0.06
Insurance...................... 1.06

Taxes...OOOOOOOOOOOOOOQOOOOOOO.1.25

"el. and ”elefraph............. 0.05 8.50
Bet Operatina Brofit...................... 3.57

Financial Expenses
Interest ExPense............... 1.09 _
gale‘q v71'-°.,'3011r11:'000OOOOOOOOOOOOOO 2.53 1.62

Financial Income
Interest Income................ 0.33
0iscounts Received.............'0.¢l 1.24

 

 

Net Financial Costs....................... 0.58

Ixet PrOfiit.0.0.00.0...OOOOOOOOOOOOOOOOOOOO 3.19

40

QCHEDULE A

Percentage Income and Costs

(33168000000000...0.00.00.00.01304
Cost of Goods 5old........... 75

Cross mradinp: Eargin........ 25
0elling Expenses............ 15.15

Het Trading Margin.......... 11.87
Administration EXpenses..... 8.30

Net Operating Profit........ 5.57
Net Financial 0osts.........__ 0.59

:Iet BrOfitOOOOOOOCOOOOCO 3.19

QCHEDULE B
Distribution of 251 Herein

selling Expenses...........15.13¥ of sales
Adminisfirstion ixp......... 8.30
Net Financial 00sts........ 0.58
Net Profit................. 3.19

 

0ross mrafiing Margin...... 25.00

42

N

   
   
  

    
   
  
  

3elling
Expense _
13.15¢
Net
/ Finan
Adm'n. cial

  

Expense Exa.

8.5¢ .38
//:::::/'
“/ Profits 5.19

 

 

 

Cost of Goods
gold
750!

Form 16

Chart fihowing 0istribution of sales 0011ar

 

 

1 Cost of Goods 0016

{‘3

selling Expense
Adm'n. Expense

Profits

(NIP-(fl

Xet Financial Exp.

 

 

 

 

information than would the figures of any one particular day.
There are many circunstances which have a bearing upon activities
of a community, such as the weather, the social activities,
health conditions and so on. The average sale for a period,
however, would serve to iron out the variations and would be

far more satisfactory.

A ain the management is interested in knowing the
trend of the time. This may have reference to employment, the
readiness of money, which involves credit. This last element
may include the two previously mentioned. There are any number
of single items which conbine to make up these im“ortant indicators.
In the department store a complete stock record should be kept.
This record should be divided into departments and should show
such information as: amount bought year by year, amount sold
at regular price. It should give information concerning styles.
'The purchase as well as selling price shruld always be given,
Where bought, and when bought.» Supplementary infornation is
of great value. A graph showing the temperature day by day
also rainfall would be valuable. It would be well to show the
conditions of employnent, as well as the agric ltural situation.
If access could be had to index numbers and also the relative
money values all these factors would aid considerably in
showing important traneds which could be made useful in shaping
future policies.

In order to disclay all these important elements,
factors and relatienships, the accountant and controller will
reSort to many devices. We have discussfd the conventional

stat ments, which may be supported by suppleuentary information,

all of which should have for their aim to explain and make clear

44

the main subject. Often such statements rake a comparison with
previous years, showing-variat one in percentages or by graphs.
Often the standard or the expected, is shown, and any deviation
from this goal is indicated. We therefore, have presented a few
of the means which the accountant may resort to in order that his
services nay extend to the point where it will link up with the
direct controlling force and be used in the guidance of the business
enterprise. ‘

In order to facilitate the distributi n of the various
expenses a columnar record is used in which the departments are
all listed. Aside from the charge which is made to each depart-
ment, provision must be wade to clas ify the expenses according to
function performed. Advertising, as an example, is a function and
must be listed as such but aside from the total figure being given,
eacn departaent is Charged with its Share of this burden. So far
as the direct expenses are concerned no special rroblem is involved
as such expenses are Charged against the particular department in
which they take place. Extenses'of this tyre are clerk salaries,
freight and express, advertising, traveling, etc. One of‘the
above items which in the past used to be a bone of contention was
the freight and express. It is difficult to place it upon a basis
that will be acceptable unless each department has its own ship-
ments come separate from all other shipments consirned to the sane
store. This plan leaves no question as to the amount to be charged
to any given department. One store in Lansing, vichigan gave this
question of expense distribution as one of its major accounting
problems.

Pent is distributed on the basis of location with

reference to traffic. The first floor is always charged the

45.

highest rent, while the second floor ranges SOLE?h€Te around half
that of the first. All floors above the second are charged
the same rent. A sin, rents vary according to the particular
location on a given floor. .

The indirect expenses are distributed on a pro-rata
basis. Each department must carry its portion of the general
burden, and it is aiaed to distribute this burden according

to the income of each departnent brought about by its advantage.

 

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.47

Bibliography to Charteriii

Maze & Glover,"How to Analyse Costs" Thaoter 1
No.?insey, James O. "Managerial Accounting” Chapters 1,9,13,11,12

”recory, Homer E. ”Accounting Reports in Rue. Fang't.
Thapters 1--7 inclusive

Folts and %tillnan, "Interpretive Accounting' dhao.3—-12

Rorem anns 3. "Accountin: Xethod” Ohspters 12,13

(lionard V. Hayes, Accounting for Executive Control 9396 114

(2) . " " " " " " 115--116

(D

,3.»

ChapterI}’

department store Accounting

The Inventory

In any merchandising enterprise the inventory,
consisting of stock in trade, comprises one of the most
important forms of assets. With the enactment of Income
Tax legislation this importance has seemingly increased.
In any mercantile business an accurate determination of
the profit earned during a given period is dependent
upon a preper evaluation of the inventory of the mere
chandise on hand at the close of the period. With this
inventory known it becomes a simple matter to ascertain
the cost of sales figure, which subtracted from net
sales gives the gross profit. The government is endeav-
oring to standardize the methods employed in the taking
of inventories, so as to make the burden of taxation as
equitable as possible.

In addition to the necessity of having accurate
inventory figures on hand at the end cfi'a period’s know-
ledge of the goods on hand during the period is important
because it enables the merchant to know when to buy and
also how much to buy. mhe writer was forcibly impressed
with the trend toward inventory reduction. The stock
room is largely a thing of the past, and the quantity
of the various units carried. is left pretty much to the.
department heads.

”he pricing of inventories during periods of stress

49

or changing prices presentSreal problems tn the merchant.
“he same problem is encountered in the case of physical
deterioration of goods. Tt may be asked why these con-
siderations should affect inventory valuation. ”he real
loss does not appear to be sustained until the goods are
sold. fhe effect of recosnizins deterioration or depre-
ciation at inventory time is to decrease the amount of
profit for the period. This decrease in profit is due
to a correSponding increase in the cost of soods sold,
which decreases the gross margin. This important principle
emphasizes the importance of exercising foresight, even to
the point of anticipating losses when they are but dimly
vissible. It is important to note in connection with the
point cited that the loss was not chargeable to sales
but rather to purchases. mhis being true, it is proper
to charge it against the profit of the current period. It
is a safe rule to follow to value merchandise at the
actual cost of replicementf‘)

From the standpoint of control, the amount of
stock shortage should be known, otherwise this element
may run into immense proportions. There is no possibility
of such a check unless there exists entirely independent
of the physical inventory some other means of determinins
the amount of merchandise in stock and the cost of the
seeds sold. If merchandise records are operated in such
a way as to provide book figures of the stock that should
be on hand , these i‘ir‘zures may be compared and any discrepancy

(2)
noted.

In order to control the business efficiently the
business executive must have some means of knowing at
frequent intervals whether or not the planned rate of
profit is being maintained. As previously pointed out
the profit of a given period cannot be determined in a
mercantile business without a consideration of the value
of the merchandise left on hand at the close of the season.
It is therefore seen that there must be some means of obtain-
ing frequent checks on business operations without going
through the laborious and costly method of physical inventory
taking. Such a check—up may be bad if book figures are
maintained which show at all times the value of goods on
hand and the cost of goods sold. This last feature requires
that book figures be kept on a monetary basis, which is
complicated by the fact that goods are bought at one price
and sold at another. mhis is made possible by employing
what is known as the Retail Hethod of Inventory, which we
shall discuss in detail very shortlyfé)

”here are three systems of inventories employed
in department stores. mhese are the perpetual inventory,
the physical inventory and the retail method of inventory.
We shall now discuss these systems in the order named
above.

The perpetual inventory finds its most ready
application to stores which carry a number of units of
standard articles on hand at all times, and where those
sold are replaced by identical articles. The perpetual

inventory may be kept in terms of quantities of units,

in values only or it may be kept in terms of quantities and
values. This point must be determined with the nature of
the product in mind. Uinimum stock in any department may be
disclosed first by the perpetual inventory clerk, and it

is therefore customary to pass the purchase order over the

desk of this clerk to serve as a check against unnecessary

 

 

 

 

 

 

 

 

 

 

 

ordering.
.INVEHTORY RECORD

Date Rec'd. Sold Balance Date Rec'di Sold Balance
1929

12 31 10,000

19 O k?

1/15 1500 2,000 9,500

1/20 500 9,000

i
Articlemm (57,”? u‘ -- _ ., \

 

 

 

By referring to the above chart it is seen that
records are kept of individual lines of commodities which
are charged to stores. Credits are made for goods drawn,
and the balance at unit prices constitutesthe current
inventory which is subject to periodic count for verification.
Because of tie steady trend toward stock reduction, the
perpetual inventory is gradually loaifig' its accustomed
place among accounting records, or is being adapted to
give more effective service. ”his modified form will be

treated fully in the latter portion of this chapter.

The second system to claim our attention is the
physical inventory which every merchant must take at
greater or lesser intervals. ”he taking of the physical
inventory is an important piece of work. While methods
are in use which enable. managers to arrive at the amount
of merchandise in stock with a fair degree of accuracy,
such methods do not reveal shortages which may exist.
While the expense and inconvenience of inventory taking
is great, it is never-thesless necessary to go through this
routine in order to check any shortage which may exist.

The inventory should be taken on loose sheets.
These sheets should be prepared for each department in
advance, by having the heading written in and the sheets_
numbered consecutively for each department. It is always
well to have a.clerk do all the recording, while another
person devotes his entire time to actual stock taking.

As the physical inventory is commonly taken while.the
business is in operation, the inventory sheets should

be pinned to the counter or shelf, and sales should be
noted as they are made until such time as the count is
completed. The sales indicated are then deducted and the
net figure becomes the inventory of stock on hand. While
errors in count and translation of code occur,'it is
commonly agreed that the physical inventory is the most
accurate system in present use. Because of this fact it
is used as a check on other methods which are less reliable
but more economically employedfq)

department store merchandise may be roughly

53

classified under three heads. (1) Goods which must be
weighed or measured. ’2) Piece goods, and (3) goods which
come in boxes. After the number of units have been recorded
and the price per unit or group of units has beenfilisted

the actual inventory figure is arrived at as a part of

the regular office routine.

The method of inventory taking which we shall
devote most of our attention to is known as the Retail
Method. It is of comparatively recent origin although
traces of it may be found in some stores dating back as
far as twenty years. With the keen competition entering
into business, it is very essential to have the means of
frequent checking up so that the management may know that
the business is progressing properly.

Even a young person can remember the day when
the customer would haggle over the price of a given article
and would often buy the article at a price which was con-
siderably below the figure quoted. duch price reduction
on some of the goods carried by the merchant would throw
a disproportionate expense burden upon the profit margin
of the goods sold at regular prices. The outcome naturally
was that the profits were below the expected figure and
did not represent a fair return on the capital invested.
It seems that the merchant would entrench himself about
the cost price of a given commodity and if necessary

would sell the article uncomfortably close to that figure.

54

(ith the shifting of the emphasis from the
purchase to the selling price, the retail.method of
inventory is but the natural outcome. In the opinion of
the writer the system has sufficient merit to bring it
into considerable prominence, and we shall therefore
describe the working principle in considerable detail.

To illustrate let us assume that in the furniture
department of a store, the stock on hand at the beginning
of a period is 51,830 at cost and *2,700 retail. Subsequent
purchases total 54,200 cost and 56,030 at retail. The sales
during the period amounted to 4"5,830 which left an inventory
valued at A2,900 retail. (2739 plus 6330: a“sumo. ss,voo—
65,800 = *2,930) In order to determine the cost value of the
inventory the percentages of cost and mark-up must be known.
In our example the total cost is 66,300. (1890 plus 42cc)
”he total retail figure as noted was A8,700. (2730 plus 6300)
The total mark-up is therefore ”2,730. Qy dividing this last
figure by the retail price (*8,710l taken as 1301, we are
given 31 as the per cent of mark-up. The complement of this
is 69 which corresponds to the cost of goods on hand and
sold. By applying this cost percentagef69) to the inventory
sales price, we obtain $3001 which is the cost of our
inventory. Similarly we can apply the same percentage to
the sales and obtain the cost of sales. This figure in our
eiample is found to be ”4,132. (69% of ”5,800) The gross
margin is then obtained bv merely subtracting *4,©02 from

7;)
55,800 which is “1,798.

(3) Retail Method of Inventory — Holcomb Mo Hair

As previously stated there is a growing tendency
to place emphasis on sales rather than purchases or the
cost price. In some respects it seems logical that the
gain is a certain per cent of the cost price, or as it
is some times stated a per cent of the investment. No
particular fault could be found with this method of com~
puting gross and net profit. However as one attempts to apply
this same rule to expenses it does not work so well. In the
routine of selling, the wages af the selling force, rent,
advertising and other expenses are paid out of receipts from
sales, and it seems equally logical that in view of this fact
sales should be taken as the base, and have the various
expense items conform to percentages of the sales figure.

It is quite common to hear the expression that an
up—to—date merchandise manager in a department store sells
the goods before they are bought. This simply means that he
plans the sales in advance. He decides what commodities are
wanted as well as the price at which they must be sold.
Having determined these points he endeavors to have his
buying ' conform to his plans. when the purchases, stock,
and sales are all planned in terms of the selling price
it is very natural that the inventory should be maintained
in similar terms. Even the turn-over is overstated when
the net sales “ divided by the inventory at cost. mhese
two figures do not rest on the same denominator, and therefore
cannot give an accurate statement of facts. When the inventory

is maintained in terms of the selling price it is seen that

Complete computation according to detail Method

56.

 

1
Cost

2
Retail

3

 

 

 

 

 

Merchandise Mark-up % Mrk—up
1. Opening Inventory (Lines 9 and 10
of preceding periodi....... ...... ....... ....... ....
2. PurOhaaeS 00.000.00.00oooooueooooooi0000001-oo eooeoooooooeooeo
3. Freight, Express, and Cartage In .. ...... 000 000 000
4. Additional Mark-up, Less Additional
I'Iark-up 08.110611315110118 000000 330 000000 0000000 0’70
5. motal Inventory Plus Additions .... ...... ....... ....... ....
6. IIet Sales 0.000.000.0000...00...... 000 .00... GOO 000
7. Mark-downs, Less Mark-down cancell~’
3thflS-....¢I F).)O 000000 300 000
8. Total Retail Ueductions (sum of
lines 6 & 7) 000000000. 030 0000000 ”00 000
9. Resultant Retail Inventory ( Line
5 Column 2,. minus Line 8)....... 090 ....... GOO 090
10. Calculation of Cost Percentage:
(a) Total Percentage......130 %
(b) Percentage of Hark—up
(line 5, column 4),, _:Z
(0) Percentage of Cost
(a-b )00000 92’
11. Cost Inventory (item 11 c Applied
to item 9)....00000000000000 00000 ”no 330 03’)
12. Resultant Mark-up and Percentage
(item 9, minus item ll .. 000 000 ....... ......
15. Gross Cost of Merchandise Sold
(difference between cost
.inventories on lines 5&11) ...... 030 000 000

 

v— 1

 

 

 

 

57

it is but a short step to reduce it to cost by applying the.
percentage representing cost. The above diagram is given
so as to enable anyone to compute the figures necessary in
the conduct of the modern department store.

With the many possibilities of price changes
it is readily seen that prices may vary considerably during
any given period, and one would encounter difficulty in hitting
upon a figure which would represent the average mark-up or
mark-down as the case may be. For each department or for each
class of merchandise, inventory is entered at the beginning
of a period at both cost and retail figures. Likewise all
purchases during the period are entered at cost and retail.
To tie tjtxl retail 7"ingmw. is added the sum of additional
mark-ups less mark-up cancellations. By observing these
rules consistently complete cost and retail figures are
available at all times for all merchandise handled during
any given period. Phe difference between the total cost
and the total retail figures is the margin of gross profit
or mark-up. This margin is computed as a percentage of the
total retail figure and the complement of this percenta~e
represents the cost of merchandise. With such costs at hand
the managers may have check—nos as frequently as desired
and it readily seen that such available data world give the
user a decided advantage over competitors who do not have
access to similar information.(3)

From the total retail figures are subtracted net
'sales for the period plus mark-downs less mark—down can-

cellations. "he resulting figure is the book retail value

of the merchandise which should be on hand.

for any losses the physical inventory would have to be taken

and serve as a check, but this clearly is not necessary more

58

In order to account

than once or twice a year. At such times discrepancies may be

adjusted and listed as a shortage or overage as the case may be.

To the actual retail inventory figure is applied the complsment

of the percentage of mark-up in order to ascertain the cost or

market valuation of the closing inventory. The two diagrams

which follow will illustrate the method of handling such

mark-ups or mark-downs.

Correct Method of Handling Additional Mark-ups

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Merchandisefi Cost Retail Mark-up % Mggk- % Cost
Opening Inventory...... $2,000 93,000 i1,ooo 33.33 66.67
Purchases ,,,,,,,,,.,,, 3,000 4,000 1,000 25.00 75.03
Additional Mark-upiflet) .......... 300 300 ......... .. .
Total Inventory,,,,,,,, 5,000 7,300 2,300 31.51 68.49
net sales ....................... 5,215 ........ .......... 0..
Retail Book Inventory.. ......... 2,085 ........ ......... .....
Cost of Inventory . 68.49% of Ret il

Correct Method of Handling Mark-downs

Merchandise Cost Retail Mrk-up % Mrk—up é Cost
Opening Inventory.,,.. $2,000 33,000 31,000 33.33 66.67
Purchases............. 3,000 4,000 1,000 25.00 75.00
Total Inventory‘,..... 5,000 7,000 2,000 28.57 71.45
Net sales .I.......... 0......0 4,715 000...... ........ .....
Add P'qark-downso....... ........ 400 .....O... .0...... .O...

E’IIE

Retail Book Inventory ........ 1,885 ......... ........ .....
Cost Value of Inventory = 71-43% 0f 1835 : “1,346.4

 

 

 

 

 

 

With the government entering upon its Income Tax
program, the question of inventories immediately came into
the lime light. The regulation published by the Treasury
Uepartment says, " In order to reflect the net income
correctly, inventories at the beginning and end of each
year are necessary in every case in which production,
purchase, or sale of merchandise is an income—producing
factor." (Article 1581 page 316- Regulation 62, Treasury
Department, United States Internal Revenue, 1922 edition.)

The interest of the Treasury hepartment in methods
of inventory calculation is easy to understand, since in
undervaluing an inventory of merchandise correspondingly
understates the income of the business. It is not strange
therefore that the federal tax authorities refused to accept
the returns of department stores baSed on the retail method.
In the meantimc.department stores interested in retaining
the system for internal control purposes, were pressing their
cases upon the attention of the Treasury Wepartment. Trade
Associations also made special efforts to secure permission
for retail merchants to use the retail method in making out
their tax returns. In response to these appeals a number of
rulings have followed which have had considerable bearing
upon the question of adopting the retail method.

On August 16, 1920, Treasury decision 3058 amended
the existing income tax regulation by inserting an article
permitting retail dry goods merchants to make their tax
returns on the basis of the retail method. Later the same

privilege was extended to other than dry goods merchants

60

and the final stand of the federal department is summarized
in their statement of March 22, 1923, which added to previous
rulings the provision that where a fictitious book profit
was shown by a retail store at the time when it changed from
the cost to the retail system of computing inventories, such
book profit need not be included in the taxable income. This
last ruling removed from many stores the final objection to
the method or to its adoption. 'It is seen then that the
Treasury Department does not orly sanction the use of the
retail method but has made every provision so as to make it
possible for it to be adopted.{c)

Uepartment stores using the retail method have
found that the advantages which the system holds over
other methods are of two classes: (I) advantages connected
with the actual taking ofthe inventory, and {2) advantages
in facilitating stock control.

When an inventor" is taken to determine the cost
of goods on hand, it becomes necessary to translate the
code back to cost figures. This step is usually attended
with many errors. By using the retail method this process
of decoding is unnecessary. In addition to this protection
against errors, a distinct saving of time is made possible.
In some instances department stores have reported a saving
in time amounting to one half has been accomplished because
the retail figures are written clearly and may be recorded

without any difficulty.

81

As the physical inventory becomes merely a means
of checking against the book inventory, it may be taken at
a convenient time as well as at a time when the stocks are
low in various departments. Every one is familiar with the
usual custom of up—turning the entire store at the close of
the holiday season. New stock has to be laid out and inven-
tories taken,a job which compresses into a day or two= the
work of as many weeks.

Even more important than the advantages enumerated
above is the possibility of determining the proper valuation
of merchandise on hand during a declining market. Federal
income tax regulations do not permit of arbitrary percentage
reductions to allow for price declines. In the use of the
retail method either cost or market may be used depending
upon which is lower. Under the old system therefore it is
necessary to go through the entire stock and re-value every
article in order to meet the requirement of treasury officials.
In order to indicate the importance of this last point the
experience of a large eastern department store will be cited.
the sales of this firm were in excess of 525,330.300. annually,
and prior to the adoption of the retail method in 1923, the
expense and difficulty of making an accurate appraisal at
inventory time was so great that for several years the firm
had preferred to take the inventory at cost and run the risk
of paying taxes on unrealized profits. This point is enhanced
when one bears in mind that the years prior to 1?23 were
years of readjustment following the war. Prices were on a
continual decline.

Another advantage of far-reaching importance is

52' .4

found in the fact that it shows at any time the effect on
the gross margin of the mark—downs of the merchandise in
stock. This feature makes it unnecessary for an enterprise
to go through the season entertaining the belief that a
satisfactory gross margin is being maintained only to find
at the end that it was inadequate.

The point has previously been made that there
has been a decided trend toward inventory reduction. This
is true even to the extent of making the stock-room a thing
of a past age. The retail method claims particular merit
in this connection because the stock figure which has been
set up is more effectively held to. The experience and
testimony of a department store located in Atlanta, Georgia
will be interesting to say the least. The manager of this
store stated that they were able to reduce their inventory
“139,000. during the first two years which they used the
system referred to, and felt that nothing more could be
done along this linefonly to be surprised by making another
reduction of 523,000 the following year. As one reflects the
meaning of such reduction upon the returns on capital
invested, as well as reducing the hazards connected with
style changes, shelf-wear, insurance costs and many other
elements which might be named, the system is seen to have
considerable merit.

The merchant often suffers great losses in case
of fire. The best he can do is to guess at the amount of

stock lost, and often he is not able to meet the convincing

63

arguments of the trained insurance experts. On the other
hand if he has cold book figures to present,his risk is
reduced and the time of making adjustment stands to be
reduced as well.

One point against the method is that it is an
averaging method. This objection shows up when there is
a disproportionate amount of high or low cost goods. Thus
the valuation is too high when more low cost goods are
included than high cost, and similarly too low when more
high cost goods are carried. It would seem that this
handicap could be overcome if the inventory were divided
into sections conforming to certain price levels and then
make the mark-up or mark-down applicable to each price
level as a unit. These units could later be combined into
a whole for recording purposes. For all practical purposes
howchr *Le danger of errot is but very slight. A second
objection is the fact that accuracy is dependent upon the
proper mark-downs. But this point does not apply to the
retail method as being peculiar to this method. The solution
of course lies in making the proper mark-downs as soon as they
are evident. The third objection is also open to question.
It is charged that more clerical aid is required, which may
be true in very small stores. In stores whose average sales
amount to “500,000. annually there should be a saving of no
mean amount. At any rate such costs should be compared with
the costs of physical ianntory taking, or with the advantages

offered.along other lines.

DEPT

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66'

“orm number 1? ' which is presented herewith,because
of its complexity, should have,c3rsidersble explanation.
mhe present tendency is to have the various factors per-
taining to the business under constant control. Tr order
to make this possible, the facts concernins these elexerts
must likewise be known, and be so coordinated that this
relationship till s‘w:1 »Ln with the minimum amount of
study on the part of manasers. "he above chart has been

desi

‘1‘

ned to place the mavimum amount of information at
the finger-tips 0‘ those in charse.

A glance at the chart will show that the merchandise
inventory as well as purchases durins a period are carried
both at cost and retail prices. 0olumn 3 therefore represents
the per cent of mark-up of the inventory additions. “his is
obtained oy first subtracting the cost i’rom the retail, and
then divide the result by the retail price. As indic-ted this
sives the per cent of mark-no as 29.57. and represents the
margin of gross profit. In nearly all businesses it becomes
necessary to sell various items at a reduced price. 0uch a
reduction is termed a park—down. We have assumed that in the
example given,a mark—down of #300 has been made and me wish to
know what per cent this is oin our sales price. “y dividing
taco by 743,210 we find that it is 0.394. Asain it is almost
unthinkable that a department store would go through any
accountinr period without realizins a shrinkage in goods.
"his, as already stated is ascertained by comoaring the book

inventory with the actual amount of the physical'inventory

such comparison is made in money value, or by comparin: the
retail orices o? the two inventories. Asain w) wish to know
what oer cent this A25. is of the retail value of the stock
sold. . Accordinsly we iivide AZEN”) by *4),210 and set as
our result .04 4. Tolumn 9 is obtained by combining columns
4 and 6 as is readily seen. dy haVing available the sellins
price of the merchandise which was purchased and on hand, as
well as the net sales for the period, we can easily arrive
at the closing inventory bv merely subtracting sales from
the retail value of the goods held durins the period. is the.
mark-up was 29.57 per cent, we take the complement of this
which is 70.634 0” tie retail inventory, and thereby arrive
at the cost 0" such inventory.

It is fairly safe to assume that the closing”
inventory of one period will be approximately the same
as the inventory 0” another period, we are led to conclude
that these inventories represent the averare investment.
of a given business. is has been previously pointed out
these elements are based on the same denominator, being
eroressed in terms of selling price, and by dividing the
net sales by the closinq inventory we arrive at the rate
of turn-over during any given period oi time. Column 15
is obtained by applying the percentase of column 14 to
column 8 which by means of the known cost of goods sold
enables the accountant to make out statements and satiety
the manasement that the business is prosressins in the

right direction. mhe cross profit is found by subtractins

number thirteen from number eisht. Quite Often the sross
profit of a store is very satisfactory, but when the various
operatins expenses have been deducted the net profit is
entirely inadequate. It is therefore illuminating to

think of the sross profit in terms of per cent of sales.

mhe assumed operating expenses amountins to 56,510 are

of course arbitrary, but by subtractins this amount'from the
sross profit of “11. 917 we have left 55,317 as net profit.
It is always interestins to know what per cent of sales the
net profit is, and as before we divide the net profit by

the net salesfisure and secure as our result 13.22 pe" cent.
Item 21 which is'discount siven"lmounts to 525. and must also.
be deducted from net Operating profit. ”his leaves us the
amount of ”5,292.3? as net sain, or total profit. Again

the manaser would ask, " What is the per cent of gain on our
investment?" whis last information is desired by everyone
havina the least interest in the business. r"he chart which
we have Just discussed is guite naturally termed a Merchandise
Synopsis, because it brinss tosether into one picture a larae
amount of interesting data, which makes valuable comparisons

possible and finally more efficient and profitable control.

T3”110smphy to chapter I

Retail Method of Inventory, Holcomb Re. Hair, Chapters 1-4

Accounting Reports in Business isn't, Homer 3 Gregory
Chapter 22

Accounting Systems, George 3. Bennett, Pages 294, 295
Managerial Accounting, James O. hc Kinsey Chapters 11,29
Row to Analyse Costs, Maze and Clover, Pages 45,195,235

(1) Retail Method of Inventory, Uc. Hair Page 6

( 2) H n 1 vv n 6
( 3) '1 u u n H 7

(4) Accounting Systems, Georse E. Bennett, Page 294-5
(5) Retail fiethod of Inventory, Ho. Hair Page 12,13
( 6 ) H n H H 'Y 14

(7) n vv '1 'V M 18—24

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