Table of Contents
Chapter 1: Description of the Retail Industry
-
Purpose for the Audit Technique Guide
-
Description of the Retailer
-
What Retailers Do
-
Demographics of the Retail Industry
-
Retail Entities
-
Useful Retail Web Sites
-
Unique General Industry Terminology
Purpose
for the
Audit
Technique
Guide
The
purpose
of this
Audit
Technique
Guide is
to
provide
guidance
on
conducting
income
tax
examinations
in the
retail
industry.
It
incorporates
procedures
and
techniques
that
have
been
shown to
be
practical
or
unique
to the
retail
industry,
that
will be
combined
with the
examiner’s
good
judgment,
skill
and
experience
to
complete
the
examination
within
the
shortest
possible
time
with the
least
burden
possible
to the
taxpayer.
Use of
these
techniques
does not
imply
that the
object
of the
examination
is to
find a
deficiency,
but
rather
to
determine
whether
the
reported
income
and
expenses
have
been
accurately
reported.
Because the facts and circumstances of each taxpayer are unique, the procedures applied will be slightly different in every examination, and the strategy will remain dynamic. The examiner will combine the techniques that apply to each specific case and apply his or her basic knowledge to the practical situation at hand.
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Description
of the
Retailer
Retailers
purchase
items
from a
supplier
or
wholesaler
for
re-sale
at a
profit.
The
retailer
earns
his
living
by
making a
profit
on the
re-sale.
To do
this the
retailer
may
offer
only one
type of
product,
where
there is
little
competition,
and use
a
substantial
markup
(such as
an auto
dealership),
or the
retailer
may
offer
many
different
products
or
models,
so
customers
will be
certain
to find
an item
to buy
in this
store
and not
in a
competitor’s
store
(such as
a
convenience
store).
Some
retailers
earn a
small
profit
on many
items
and rely
on the
volume
of sales
(such as
grocery
stores),
or
turnover,
to
account
for
their
profits.
For
these
reasons,
the
retailer
will
constantly
assess
whether
items
for sale
are
turning
over
properly,
and if
necessary,
will
retire
an item
or
product
and
introduce
new
items or
products
for
sale.
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What
Retailers
Do
Retailers
purchase
a
product,
mark up
its
cost,
and
advertise
it for
sale.
The
mark-up
process
is the
key to
the
retailer’s
business,
because,
if the
product
is
marked
up too
high,
consumers
will not
buy it;
if it is
too low,
the
retailer
will
have
lost
profits
and the
supply
may be
quickly
exhausted.
Another key to the retail business is knowing what the customer needs or wants and when, how much the customer is willing to pay for the product, what the competition is charging, and where to find the product at the best possible cost to make a profit.
These items and products held in the retailer’s possession are called inventory. Inventory is money out of the retailer’s pocket, so the retailer tries to keep available only the amount that is needed. The retailer only makes money when inventory is sold, and business profitability is measured by inventory turnover rates.
All decisions made in this process, finding the product to sell, marking up its cost and placing it for sale, are made with the expectation of earning a greater profit.
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Demographics
of the
Retail
Industry
Retailing
is one
of the
largest
industries
in the
United
States
and
accounts
for
approximately
10
percent
of our
gross
national
product.
Retail
business
covers
many
different
areas,
including
auto
dealerships,
bars,
convenience
stores,
restaurants,
gift
shops,
clothing
stores,
merchandise
stores,
etc.
There has been enormous growth and innovation in American retailing in this century. Neighborhood markets and drugstores of the early 1900’s have succumbed to population growth and demographic shifts to become department stores and grocery stores in the 1950’s. As cities became crowded, families continued to move and the interstate road system improved, suburban shopping centers and malls were created. Chains, franchises and catalogs have built them into national brands today. Retail warehouse concepts continue to increase. Technology has enabled product scanning, sophisticated marketing techniques and Internet shopping.
During the past 2 decades the retail industry has been a leader in the number of mergers and acquisitions. During the 1980’s the Wall Street Journal stated that the retail industry was “percolating with mergers and acquisitions.” In recent years the retail grocery industry has been involved in numerous acquisitions.
Technology has played a significant role in acquiring and maintaining inventory. It has allowed a “partnership” between vendors and retailers in quick response replenishment of inventories. Point-of-sale terminals, bar coding, customer credit cards, etc., have led to better, more accurate recordkeeping by retailers.
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Retail
Entities
Small
retailers
are
sometimes
called
‘mom and
pop’
stores
because
they are
family
owned
and
operated.
An
example
of this
might be
a
generic
convenience
store or
a
boutique
in a
strip
mall.
This
type of
business
may be a
sole
proprietorship.
Even if
both
spouses
work in
the
store,
only one
may be
the
proprietor.
Only the
proprietor
spouse
may pay
self-employment
tax.
It is not unusual for ‘mom and pop’ stores to enter into a partnership, or for family members to form a partnership. This might be done to give each member a share in profits or it might be formed because the business is growing.
Large retailers may include many store locations and hundreds of employees. Both small and large retailers might include activities reported as sole proprietors on Form 1040, Schedule C, as partnerships on Form 1065, or as corporations on Form 1120 or Form 1120S.
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Useful
Retail
Web
Sites
Some
useful
web
sites we
recommend
looking
at
include:
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Unique
General
Industry
Terminology
There
is
some
terminology
and
practices
unique
to
the
industry.
It
is
recommended
that
examiners
familiarize
themselves
with
the
terms
unique
to
this
industry
prior
to
the
initial
interview
in
order
to
facilitate
the
examination.
Each
Retail
sub-industry
will
also
have
it’s
own
unique
terminology.
See
the
particular
industry
section.
Industry Term |
Definition or Explanation |
|---|---|
Bar Code |
A series of vertical or horizontal parallel lines forming a code that is optically read and interpreted by a bar code scanner. Used on envelopes and forms for rapid entry of data and for sorting. Bar coding may be an indication that the inventory is computerized. |
Chargebacks |
The retailer’s invoice for claims against a vendor resulting from items such as damaged merchandise, cooperative advertising costs, adjustments, and the recovery of transportation charges for improperly routed merchandise. Chargebacks are usually shown on the vendor’s invoices. |
Cooperative Advertising |
Advertising paid for jointly by the advertiser and its wholesalers or retailers. For example, the landlord of a strip mall may collect a percentage of advertising from each tenant. This is used for advertising that will benefit all of the tenants. |
Cost Complement |
The average relationship existing between the cost of merchandise and the retail value of the items handled during an accounting period. The dollar value of the inventory at cost is divided by the dollar value of the inventory at retail. |
Layaway |
A method of deferring payments whereby goods are retained by the store until the customer has completed payments for them. |
Markdown |
A reduction of an originally established selling or previous retail price. |
Markup |
The difference between cost price of goods and their retail price. The initial margin between the selling price and cost. It also is referred to as mark-on or gross margin.Additional markup: An increase above the original selling price. |
Markup Cancellations |
A reduction in the price of an item after it has been subject to an additional markup. Markup cancellation never exceeds the amount of additional markup applied to an item.An increase in the selling price, following a markdown, which does not raise the new selling price above the original selling price.Markdowns less markdown cancellations are referred to as net markdowns. |
Markdown Cancellations |
The increase in the retail price of an item that has been reduced.A reduction in the selling price after there has been an additional markup. The reduction does not reduce the selling price below the original selling price.Additional markups less markup cancellations are referred to as net markups. |
Promotional Markdowns |
A lowering of the retail price hoping to encourage greater store traffic. Unlike clearance markdowns, promotional markdowns are regarded as an integral part of some retailer’s offensive strategy calculated to increase sales. Frequently the promotional markdowns are temporary. |
Push Money |
Bonus money paid by a vendor or a retailer to sales people for selling specially designated merchandise. |
Quick Response (QR) Inventory System |
A cooperative effort between retailers and their suppliers aimed at reducing retail inventory while providing a merchandise supply that more closely addresses the actual buying patterns of consumers. |
Retail Method of Inventory |
An accounting technique for recording all inventory inputs, including sales, purchases, markdowns, and so on, at their retail values. Purchased items are recorded at cost. |
Shrinkage |
The gradual loss of inventory over time due to damage, misplacement, or theft. |
Specialty Stores |
Retail outlets that maintain a large selection in a limited line of merchandise. |
Stock Book |
A book, maintained by the buyer, in which are entered additions to stock (inventory) in the form of merchandise received from vendors, and merchandise deductions which represent sales to customers. |
Stock Keeping Unit (SKU) |
A measure of an item of merchandise for inventory management. In inventory control and identification systems the (SKU) represents the smallest unit for which sales and stock records are maintained. |
Stock Overage |
A condition where the actual items on hand, as determined by physical inventory is greater than the amount indicated in the stock (inventory) records. |
Trade Discount |
A deduction from the agreed price, usually expressed as a percentage or a series of percentages that is used in commerce to encourage prompt payment of bills; should not be entered in the books of account, nor should it be considered to be a type of earnings. |
Workroom |
In retailing, a non-selling area devoted to such support services as apparel alterations, etc. |
Universal Product Code (UPC) |
UPC is a categorization where each item is given a ten-digit number, pre-marked on the package by the producer in the form of a bar code over ten corresponding numbers. |
Retail Price |
The price at which goods originally are offered for sale. |
