As more tariffs are effective on goods imported in the US, the major implications for a specific accounting method can be the implication of how the effects of American retailers are calculated.
A tariff adds to the cost of an imported item when it is obtained and when it crosses a limit is paid. Whereas there is a debate on who pays that tariff – manufacturer, retailer, consumer or some combination – the hit will possibly appear in the lower lines of retailers.
But a specific accounting practice, called retail inventory method accounting, or rim, can make profitability stronger than short term.
Ali Furman, leader of the PWC US Consumer Markets Industries, said, “Retail Inventory Method Accounting (RIM) is less responsive for the cost of cost changes as compared to cost accounting, and can initially reduce profitability.” “Once it will be normal after stabilizing the tariff, it depends on how much the cost absorbs retailers.”
Because RIM uses the average cost-to-ritual price ratio in a comprehensive group of goods, instead of the actual cost of each item, such as in cost accounting, RIM does not occupy the immediate effect of a completely rising cost.
Retail method of accounting.
CNBC US Source
According to PWC, about a quarter of American retailers used the retail list of accounting. Wal-mart, Target And Home depot Among them. All three retail vendors report the quarterly income this week, and their results cannot be fully seen how Tariff has cut their profitability so far.
Take the largest American retailer Walmart, who will post the fiscal second quarter earnings on Thursday.
TD Cowen analyst Oliver Chen estimated that about half of the walmart’s quarter would include the effect of levy among the people, as the company was brought into inventory at various cost levels before and after the new tariff rates were effective. This can temporarily distort the gross margin profitability, the chain said.
Walmart’s accounting has given information about its strategy in recent months as it navigates the President Donald TrumpUnexpected tariff policy.
A week after Trump’s announcement of the so -called “mutual tariff” on a wide health of business partners on 2 April, Walmart withdrew his guidance for operating income in the quarter of the first financial year. However, the company maintained its annual forecast, which cited the impact of rim accounting.
Walmart employees who lose the spiceor help in transport bikes in Conro on Friday, December 8, 2023.
Jason Foatchman | Houston Chronicle | Hresht Newspapers | Getty images
Then when it reported its fiscal first quarter earnings in May, Walmart said it would reduce the greater cost, but possibly some prices will increase at current tariff rates.
In response, Trump wrote on his true social platform that Walmart should eat “just” to the tariff.
Doing so can actually benefit the lower line of a retailer, at least in the beginning, according to Furman.
“More cost retail vendors absorb in retail accounting, more risk of exceeding profitability during the duration of rising costs, such as the tariff increases,” he said.
Walmart Management informed Trump about the effect of the spring that the effect of its accounting method could result in a high-tariff environment, according to a person familiar with the discussion, who asked to remain anonymous while speaking about private conversations.
Nevertheless, Managing Director James Bovi in EY Technical Accounts Advisory Group warned that “all inventory costing methodology will be affected in some ways.”
An employee folds a towel at a Manhattan retail store in New York City on 15 July 2025.
Spencer Plot | Getty images
According to PWC, it usually takes a large, non-fast fashion retailer to get closer to its real level. The method can initially make profitability higher, then low in the later trimester, before it is time to stabilize.
“This is such that you have received a speed boat at the price,” he said. “I can twist very quickly, but I have found a cruise liner that is carrying all my average average. It takes a little longer to bend and so even if they may eventually be able to go into the same speed, it takes a little time to have that one turn.”
While the rim is more likely to lead for temporary oversting of profitability, it can also understand the advantage if the tariff is less interacted.
Bovi said that if a retailer responds to low tariff rates by cutting retail prices under a rim accounting, “it seems that my margin is erased, but this is only because I am waiting for the cost relationship to catch back now, so [it] Margin can also look like compression in a period of decreasing tariffs. ,
Furman said that PWC is watching “a clear disconnect” for companies that use RIM accounting.
“Companies may be doing all the right things: navigating sourcing challenges, managing suppliers, and even reducing tariffs,” he said. “But, those efforts are often not reflected in financial. The misunderstanding is facing challenges to the misunderstanding retailers between operational execution and reporting for those using RIMs.”
Why use rim?
The retail list of accounting is a chronic method that was most useful for retailers when they had several items from a series of categories without an easy, or technical, manner to track.
Bovi said, “There were ways of inventory accounting before this thing called Excel.” ,[A retailer] There was an absacus and a dream that you are going to do. ,
Over time, technology made it easier to use actual costs rather than average, so cost accounting became more common.
People shop in New York City, US, August 11, 2025 at Massey’s department store in Manhattan.
Eduardo Munoz | Roots
As retailers grow and accounting methods get entangled, it is difficult, although not impossible, switching the strategy. Messi’s And Nordstrom recently changed cost accounting.
The PWC stated that it takes an average of two to three years to transition from one accounting method to another and may require restrictions of millions of dollars and previous years financials to provide apple-to-App. Nevertheless, the accounting firm said that about half of the retail vendors using the rim have considered switching.
A case study
The CNBC worked with PWC’s Furman and Suna Shampande, the firm’s American retail customer experience and the operating leader to develop a simplified example to display the difference between RIM and weighted average cost accounting, in which they affect the gross profit margin.
The example shows how RIM accounting can “overstate” actual profitability at a time when the cost increases quickly.
The listed gross advantage margin can change based on accounting methods in various tariff scenarios.
CNBC US Source
For purposes of this example, PWC and CNBC used weighted average cost accounting, which takes the SKU-level weight average and mixes all costs simultaneously regardless of the purchase date. A SKU is a stock-keeping unit, which retailers use to track the list of specific items.
Aadhaar case: no tariff
The base case, which does not include tariffs, use three different T-shirt types from three different countries. Each type of T-shirt, or individual SKU has a distinct cost and is sold to consumers at a separate retail price. The retailer bought each type of T-shirt in different quantities, as by consumers.
Here is how mathematics starts.
The gross advantage margin for calculated items using weighted average cost accounting is 46%. Using RIM, this is 53%.
Retail accounting model without tariff.
CNBC US Source
Tariff Case 1: Retailer costs increase, everything else is the same
If the cost of the retailer for each T-shirt increases as a result of the tariff, but all the rest remained units, units sold and retail value-equal, the gross margin falls if the cost is calculated using accounting and rim. But this will still be more under RIM if the company uses cost accounting.
Here is mathematics for our simplified example:
Retail accounting method If the cost of the retailer increases but prices and demand remain the same.
CNBC US Source
Tariff Case 2: Retailer increases prices to offset high costs
If the retailer passes the customer at a full dollar price of the tariff cost, and the units purchased are equally sold, then the gross margin under both accounting methods improves.
In our example, it goes up to 36% in cost accounting and 47% with rim.
If the retail accounting model increases the cost, the retailer increases prices and the units sold remain the same.
CNBC US Source
Both gross margin percentage are less than the Aadhaar case, which does not consider a tariff, but the percentage change is smaller under the rim than the cost accounting.
Tariff Case 3: Retailer bought prices and units and sold both fall
Here is that it becomes interesting, becoming more realistic, a retailer and consumer will possibly make the cost increase to reflect supply and demand options.
If the retailer passes the customer at a full dollar price of tariffs and also sells less items to consumers at a high retail price, the rim makes the profit margin temporarily.
In our example, the gross margin costs up to 27% under the cost accounting, but remains stable under the rim at 47%, even though the units sold have changed.
Here you see how there is no time to adjust the ratio of the cost of the goods selling the selling price.
Retail accounting method if a retailer increases prices and units bought and sold both the fall.
CNBC US Source
– CNBC pair Gralanik contributed to this report.
