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Merchandise inventory is one of the types of inventory that directly and substantially impacts a company’s financial health.

• The total amount of assets, which includes merchandise inventory, impacts a company’s solvency, or ability to meet its financial obligations.

• Merchandise inventory turnover rate reflects a company’s ability to sell its products. It gives you a metric to focus on improving to enhance your sales pipeline.

• A company’s (COGS), is based in part on merchandise inventory figures. This is one of the most important measurements of a profitable, successful business.

Ignore merchandise inventory and you immediately squander an opportunity to enhance the health of your business. Embrace it—learn everything you can about it—and you’ll have taken one of the biggest steps toward profitability a company can take.

What Is Merchandise Inventory?

Merchandise inventory is all the goods that a distributor, wholesaler, or retailer acquires from manufacturers that are intended for sale. Typically every online marketplace and retailers are the only businesses with merchandise inventory. That’s because, fundamentally, merchandise inventory is goods that are intended to be resold at a higher price than they were acquired for. 

Manufacturing inventory, MRO inventory, and raw materials inventory are not considered merchandise inventory. Understand what is inventory to get a better idea of what is considered. 

This means it's unlikely a B2B business will have to worry about it. Read more about what is a B2B company to get a better understanding of a B2B business.

Merchandise Inventory Includes...

Merchandise inventory includes all acquired pipeline inventory that is intended for resale from suppliers, in company storage facilities, on customer-facing displays, and as consignment inventory in other locations.

It also includes the price that was paid for the goods, all shipping costs that retailers or resellers paid, eCommerce packaging expenses, and transit insurance. Shipping costs, including overnight shipping, is calculated using a shipping cost estimator.

What Is Merchandise On Hand?

Merchandise on hand is the cost of goods on hand and available for sale at any given moment. Merchandise on hand is a type of merchandise inventory. It does not include the cost of goods that are in transit or inventory shrinkage. However, it does include finished goods inventory, any inventory in your warehousing, goods held on consignment, and safety stock.

Is Merchandise Inventory an Asset?

Merchandise inventory is an asset. There are two main types of assets: current and non-current.

Non-current assets include long-term investments, intangible assets like intellectual or technological property, and physical property and equipment. Current assets, on the other hand, are assets that can be reasonably expected to be converted into cash within one operating cycle or fiscal year.

Merchandise inventory is a current asset on the balance sheet. This includes a .

Why Is Merchandise Inventory a Current Asset?

A current asset is an asset that provides economic benefit during a given year or operating cycle. Think of anything that can be reasonably expected to be sold or used during that time frame. Merchandise inventory is one of the clearest examples of a current asset because it’s usually liquidated within a year of being produced or acquired.

What Type of Account Is Merchandise Inventory?

Merchandise inventory is the account on a balance sheet that reflects the total amount paid for products that are yet to be sold. As a current asset, merchandise inventory is basically a holding account for inventory that’s waiting to be sold.

It has a normal debit balance, so debit increases and credit decreases. Merchandise inventory is not only reflected on the balance sheet, but also used to calculate COGS.

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Merchandise Inventory On Income Statement

Merchandise inventory is not an income statement account. It’s an asset, and its ending balance is reported as a current asset on your balance sheet. COGS, however, is on your income statement and changes in your merchandise inventory affect your COGS.

The cost of any merchandise inventory sold during an accounting cycle is reported as an expenditure on the income statement for the cycle in which the sale was made. Any merchandise inventory not sold during an accounting cycle is a current asset and included in the balance sheet until it’s sold.

Tracking inventory is possible using inventory valuation methods. These include:

• First, First Out (FIFO): The FIFO method involves selling and shipping out the first items you receive from your manufacturer to your customers.
• Last In, First Out (LIFO): This method sells and ships out the most recently purchased inventory items first.
• Weighted average: With this process, the average cost of purchased goods is calculated from the available inventory. 
• Specific identification: Involves tracking each inventory item from the initial purchase to the sale. 

After choosing a method, you have to pick a system that allows you to track inventory value as frequently as you need it to. Physical counts of inventory are also necessary. 

Managing Merchandise Inventory

Just like any other inventory, stock levels of merchandise should be properly maintained. This can be done in multiple ways. Let’s examine some of the ways and techniques to manage merchandise inventory.

1. ABC analysis. This technique includes grouping items based on value and demand. This helps prioritize inventory and capital allocation.
2. Maintain safety stock and establish par levels. Stockouts and overstocking can be equally harmful to companies. Analyze previous sales data and market demand to determine the optimal safety stock levels and reorder points.
3. Use the latest technology. Thanks to modern software, companies can manage merchandise inventory much more efficiently. Using technological solutions allows businesses to streamline operations and cut various costs.
4. Conduct audits. Inventory audits are crucial for the proper management of merchandise inventory. They verify actual stock levels and help reduce merchandise inventory shrinkage. Nowadays, thanks to modern warehouse scanning technologies, businesses can do audits much faster and more efficiently.
5. Forecast demand and seasonality. Most businesses have strong and slow seasons. That’s why forecasting demand can help optimize merchandise inventory and use marketing channels to their full potential. 
6. Gather data and analyze it. Nowadays, data is an important commodity. Businesses should gather data from all channels where their customers are. Analyzing this data can help make merchandise inventory management more efficient. Due to modern AI solutions, data gathering is likely to be even more important in the future.
7. FIFO or LIFO – choose the right method. Both “first in, first out” (FIFO) and “last in, first out” (LIFO) have their pros and cons. FIFO is better for selling perishable goods or items that can quickly become obsolete. LIFO is preferred for products that fluctuate in price and can help manage profits in volatile niches.

Merchandise Inventory Turnover

Tracking merchandise inventory turnover is a good way to understand how efficiently your company controls merchandise. Specif