Retail inventory method of accounting
Retail inventory method is a technique used by retailers to estimate the value of their inventory. It is based on the assumption that the cost of goods sold and ending inventory can be calculated by applying a cost-to-retail ratio to the retail value of the goods available for sale.
Here’s an example to illustrate how the retail inventory method works:
- Beginning inventory at cost: $10,000
- Beginning inventory at retail: $20,000
- Net purchases at cost: $5,000
- Net purchases at retail: $10,000
- Ending inventory at retail: $15,000
In this example, the cost-to-retail ratio is calculated as follows:
Cost-to-retail ratio = (Beginning inventory at cost + Net purchases at cost) / (Beginning inventory at retail + Net purchases at retail)
Cost-to-retail ratio = ($10,000 + $5,000) / ($20,000 + $10,000) = $15,000 / $30,000 = 0.5
Using this cost-to-retail ratio, we can estimate the cost of goods sold and ending inventory as follows:
Cost of goods sold = $15,000 (Ending inventory at retail) * 0.5 (Cost-to-retail ratio) = $7,500
Ending inventory at cost = Ending inventory at retail – Cost of goods sold = $15,000 – $7,500 = $7,500
By using the retail inventory method, retailers can more accurately track the value of their inventory and make informed business decisions.
For more information on the retail inventory method, you can visit Wikipedia.