July 14, 2022/ Steven Bragg
The retail inventory method is used by retailers that resell merchandise to estimate
their ending inventory balances. This method is based on the relationship between the cost of merchandise and its retail price. The method is not entirely accurate, and so should be periodically supplemented by a physical inventory count. Its results are not adequate for the year-end
financial statements, for which a high level of inventory record accuracy is needed. To calculate the cost of ending inventory using the retail inventory method, follow these steps: Calculate the cost-to-retail percentage, for which the formula is (Cost ÷ Retail price). Calculate the
cost of goods available for sale, for which the formula is (Cost of beginning inventory + Cost of purchases). Calculate the cost of sales during the period, for which the formula is (Sales × cost-to-retail percentage). Calculate ending inventory, for which the
formula is (Cost of goods available for sale - Cost of sales during the period). Example of the Retail Inventory MethodMilagro Corporation sells home coffee roasters for an average of $200, and which cost it $140. This is a cost-to-retail percentage of 70%. Milagro’s beginning inventory has a cost of $1,000,000, it paid $1,800,000 for purchases during the month, and it had sales of $2,400,000. The calculation of its ending inventory is:
Retail Method Advantages and DisadvantagesThe retail inventory method is a quick and easy way to determine an approximate ending inventory balance. However, there are also several issues associated with it, which are as follows:
Terms Similar to Retail Inventory MethodThe retail inventory method is also known as the retail method and the retail inventory estimation method. Question Answered step-by-step Asked by AnomalyUnsolved on coursehero.com Image transcription text When computing the cost-to-retail percentage for the average cost retail method, included in the denominator are: Multiple Choice O Net markups and net markdowns. O Net markups, but not net markdowns. O Neither net markups nor net markdowns. O Net markdowns, but not net markups... Answer & ExplanationSolved by verified expert Answered by daneendg on coursehero.com um dolor sit amet, consectetur a Step-by-step explanationum dolor sit amet, consectetur adipiscing elit. Nam lacinia pulvinar tortor nec facilisis. Pellentesque dapibus efficitur laoreet. Nam ris Get unstuck with a CliffsNotes subscriptionUnlock every step-by-step explanation, download literature note PDFs, plus more.Get Access What is costThe cost-to-retail ratio looks at the percentage of an item's retail price that's made up of costs. This ratio is calculated using the formula: cost-to-retail ratio = [cost of goods available for sale ÷ retail value of goods available for sale] x 100.
When computing the costUnder the retail method, the denominator in the computation of cost-to-retail percentage includes purchases, purchase returns, abnormal shortages but it does not include freight-in.
What is the retail method of inventory costing?The Retail Inventory Method is an accounting procedure used to estimate the value of a store's inventory over time. It works by first taking the total retail value of all the products you have in your inventory, then subtracting the total amount of sales, then multiply that amount by the cost-to-retail ratio.
Is the retail inventory method LIFO or FIFO?Retail Inventory Method
The retail method can be used with FIFO, LIFO, or the weighted average cost flow assumption. It is based on the (known) relationship between cost and retail prices of inventory. In addition it is used in conjunction with the dollar value LIFO method.
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