Chapter 8
Appendix 8A
The Retail Inventory Method of Estimating Inventory Costs
Prepared by:
Dragan Stojanovic, CA
Rotman School of Management, University of Toronto
Retail Inventory Method:
Given:
At Cost
Goods available
$ 20,500
Markups
Markup cancellations
Markdowns
Markdown cancellations
Sales (net)
Compute the cost-to-retail ratios
At Retail
$ 36,000
$ 3,000
$ 1,000
$ 2,500
$ 2,000
$ 25,000
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Retail Inventory Method
RATIO A:
At Cost
Goods available
$ 20,500
Add: Markups
Less: Markup cancellations
Goods available
$ 20,500
At Retail
$ 36,000
3,000
( 1,000)
$ 38,000
Cost-to-retail ratio ($20,500 ÷ $38,000) = 53.9%
Ratio A (Conventional retail inventory method)
reflects a cost % that includes net markups but
excludes net markdowns
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Retail Inventory Method
RATIO B:
At Cost
Goods available
$ 20,500
Add: Net Markups
Less: Markdowns
Markdown cancellations
Goods Available
$ 20,500
At Retail
$ 36,000
2,000
( 2,500)
$ 2,000
$ 37,500
Cost-to-retail ratio ($20,500 ÷ $37,500) = 54.7%
Ratio B incorporates both net markups and
net markdowns
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Retail Inventory Method:
Calculating Ending Inventory
Ending Inventory (at cost) =
Ending Inventory at Retail x Cost to Retail Ratio
Goods Available (at retail)
Add: Net Markups
Less: Net Markdowns
Net Goods Available (at retail)
Less: Net Sales (at retail)
Ending Inventory (at retail)
$36,000
2,000
(500)
$37,500
25,000
$12,500
Ratio A = $12,500 x 53.9% = $6,737.50
Ratio B = $12,500 x 54.7% = $6,837.50
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