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Keeping Track of Accounts & Refunds
A generally accepted method of pricing inventories is valuation of the item at cost or market, whichever is lower.
Last month, we described how to take a physical inventory of merchandise. This month, we continue with a discussion on pricing the inventory, aging accounts receivable, and handling refunds.
Pricing the Inventory
After the physical counting of your inventory is finished, each item must be priced. A generally accepted method of pricing inventories is valuation of the item at cost or market, whichever is lower.
Cost is the price for which you purchased the item. Theoretically, this would be the invoice price, plus freight in, and any labor cost involved in assembling or completing the item.
Market value would be one of the following:
1. The replacement price of the item.
2. If the item has been marked down, your current asking price, less your normal gross margin.
3. Scrap or salvage value if the item is no longer saleable at retail.
The Retail Method
While most dealers use the cost or market value method of pricing inventory, some follow the method of department stores and use the retail method. Hence this method will be discussed. The merchant can avoid …