In short
The retail inventory method estimates ending inventory at cost by converting ending inventory at retail prices to cost, using the ratio of cost to retail for the goods available for sale.
Key takeaways
- The conventional (lower of cost or market) approach includes net markups but leaves out net markdowns from the ratio, giving a lower ratio.
- Freight-in is added to cost only; purchase returns reduce both cost and retail.
- Normal shrinkage is deducted from retail after the ratio is computed; abnormal losses reduce both cost and retail before it.
Example
Goods available cost $60,000 and retail $100,000 (ratio 60%). Sales are $70,000, so ending inventory is $30,000 at retail and $18,000 at cost.
Where it's tested
FAR: Inventory — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
Inventory has a cost of $80 per unit. Selling price is $100, disposal costs are $15, and normal profit margin is $10. Replacement cost is $70. Under the lower-of-cost-or-market rule (LIFO/retail inventory), what is the inventory's reported value per unit?