How accounting could change profitability amid tariffs
Since more tariffs are effective on the goods imported to the United States, a particular accounting method may have great effects on how American retailers calculate the effect.
A tariff increases the cost of an imported product when taken and paid when a limit exceeds. Although there are discussions about the recipe – manufacturer, retailer, consumer or a combination – the hit will probably appear in the sub -lower lower lines of retailers.
However, a specific accounting application called retail inventory method accounting or rim can make profitability look stronger than it is in the short term.
PWC US consumer markets industry leader Ali Furman said, “Retail inventory method accounting (RIM) is less sensitive to cost changes compared to cost accounting and may exaggerate profitability at the beginning.” He said. “This would be normalized after the tariffs were balanced depending on how much of the cost retailers absorbed.”
As in cost accounting, RIM does not fully achieve the emergency impact of rising costs, as it uses an average cost-price rate between a large group of products rather than the real cost of each item.
Accounting retail method.
CNBC US resource
According to PWC, about one quarter of the retailers use the retail inventory accounting method. Walmart– Aim And Home warehouse between them. All three retailers report three -month earnings this week, and the results may not fully show how tariffs have reduced their profitability so far.
Consider the largest US retailer Walmart that will earn the second quarter of the financial on Thursday.
TD Cowen analyst Oliver Chen estimated that about half of the quarter of Walmart would include the effect of taxes because the company’s new tariff rates brought inventory at different cost levels before entering into force. Chen said it could temporarily disrupt the gross margin profit.
Walmart’s accounting has partially informed President Donald Trump’s strategy in recent months while visiting the unpredictable tariff policy.
A week after Trump’s statement called “mutual tariffs” on a wide trade partners on April 2, Walmart withdrew business revenue guidance in the first financial quarter. However, the company continued its annual estimation by referring to the impact of rim accounting.
Spiceer, who lost his Walmart employee, helps to reach a bike on Friday, December 8, 2023 in Conroe.
Jason Fochtman | Houston Chronicle | Hearst Newspaper | Getty Images
Later in May, when financial first quarter earnings, Walmart said it would reduce as higher costs as possible, but probably would have to increase some prices in existing tariff rates.
In response, Trump wrote that Walmart’s tariffs should “eat” on the social platform.
According to Furman, doing so can at least benefit from the profitability of a retailer.
“The more retailers are absorbed in retail accounting, the higher the risk of exaggeration of profitability during increasing cost periods such as tariff increases.” He said.
Walmart Management gave Trump information about the effect that the accounting method may result in a high tariff environment, according to a person who is familiar with the discussion who wanted to remain unnamed while talking about private talks this spring.
Nevertheless, James Bowie, General Manager of Technical Accounting Advisory Group, warned that “all of the inventory costing methodologies will be affected by some angles”.
An employee adds towels at a Manhattan retail store in New York on July 15, 2025.
Spencer Plato | Getty Images
According to the PWC, a large, non -fast fashion retailer uses about two to four quarters for the placement of cost volatility and to approach the real level for profitability. The method can make profitability look higher at the beginning, then lower in the next quarter, without the time to stabilize.
“As if you have a fast boat on the price,” he said. “I can turn quite fast, but I have a cruise ship with all my inventory average. It takes a little longer to return, and although they can go to the same speed, it takes some time for a return to take place.”
Although it is more likely that RIM will lead to temporary exaggeration of profitability, it can understand the profits if the tariffs are negotiated lower.
Bowie, if a retailer responds to lower tariff rates by reducing retail prices, “My margin seems to be worn, but for this, I just expect the cost relationship to be withdrawn, so [it] Even during the reducing tariffs, it may seem to have margin compression. “
Furman, PWC’nin rim accounting for companies using “open disconnection”, he added.
“Companies may be doing all the right things: navigating in supply difficulties, managing suppliers and even reducing tariffs,” he said. “However, these efforts are often not financially reflected. For those who use RIM, the wrong alignment between operational executives and reports makes the difficulties faced by retailers.”
Why does he use a rim?
Retail inventory accounting method is the most useful method for retailers when there are many elements from various categories that do not have an easy or technological way to monitor inventory.
Bowie said, “First of all, there were inventory accounting methods,” said Bowie. “[A retailer] There was an Abacus and a dream trying to figure out what to do. “
Over time, it made it easier to use real costs instead of technology averages, so cost accounting became more common.
People are shopping at Macy’s store in Manhattan in New York, August 11, 2025.
Eduardo Munoz | Reuters
As retailers grow up and accounting methods are rooted, it is difficult, although not impossible to change the tactics. Macy’s And Nordstrom has recently changed cost accounting.
The PWC said that the transition from one accounting method to another lasted an average of two to three years and may require the reorganization of millions of dollars and previous years to ensure apple-elm comparisons. Nevertheless, the accounting company said that about half of the retailers who use RIM are considering transition.
A case study
CNBC worked with the company’s US retail customer experience and operation leader, PWC’s Furman and Artificial Shamapande, and developed a simplified example showing the difference between the rim and weighted average cost accounting about how they affected gross profit margins.
The example shows how rim accounting costs can “exaggerate” at a time when costs increase rapidly.
The gross profit margin listed may vary according to accounting methods in various tariff scenarios.
CNBC US resource
For this example, PWC and CNBC used a weighted average cost accounting, which has average weight average and combining all costs, regardless of the date of purchase. SKU is a stock holding unit used by retailers to monitor the inventory of certain items.
Basic Case: No Tariff
The basic case that does not include tariffs uses three different types of T -shirts from three different countries. Each T -shirt or individual SKU type has a different cost and is sold to consumers at a different retail price. Retailer, such as consumers, each type of T -shirt purchased in different amounts.
Mathematics is different to start.
The gross profit margin for the items calculated using weighted average cost accounting is 46%. 53%using rim.
Retail accounting model without tariff.
CNBC US resource
Tariff Status 1: The costs of the retailer increases, everything remains the same
If the cost for each T-shirt of the retailer rises as a result of tariffs, but other units-selling units, the units sold and the retail price of the retail remains, and the gross profit margin decreases if calculated using cost accounting and rim. However, it would be higher than the company’s use of cost accounting.
Here is mathematics for our simplified example:
The retail accounting method increases the costs of the retailer, but prices and demand remain the same.
CNBC US resource
Tariff Case 2: Retailer increases prices to balance higher costs
If the retailer exceeds the full dollar value of the tariff cost to the customer and the purchased and sold units remain the same, the gross profit margin will heal under both accounting methods.
In our example, it goes to 36% in cost accounting and 47% with rim.
If the retail accounting model costs increase, retailers increase prices and the units sold remain the same.
CNBC US resource
Both gross margins are lower than the basic situation that does not assume tariffs, but the percentage change is smaller than cost accounting under the rim.
Tariff Case 3: Increases retailers’ prices and both purchasing and selling units
It is interesting and probably more realistic to reflect the elections of supply and demand that a retailer and consumer will probably make as the costs increase.
If the retailer passes the customer’s full dollar value to the customer and sells less product to consumers with a higher retail price, the wheels temporarily show the rim profit margins.
The gross margin in our example decreases to 27% under cost accounting, but it keeps it constant under the rim at 47%, even if the sold units have changed.
Here you see how the ratio of the goods sold to the sales price does not adapt.
Retail accounting method increases a retailers and units purchased and sold in both autumn.
CNBC US resource
– Jodi Gralnick from CNBC contributed to this report.
