Chapter 8

Appendix 8A
The Retail Method of

Estimating Inventory
Cost

Prepared by:
Patricia Zima, CA
Mohawk College of Applied Arts and Technology
 Retail Inventory Method:

Given: At Cost At Retail

Goods available $ 20,500 $ 36,000
Markups $ 3,000
Markup cancellations $ 1,000
Markdowns $ 2,500
Markdown cancellations $ 2,000
Sales (net) $ 25,000
Compute the cost-to-retail ratios
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 Retail Inventory Method
RATIO A: At Cost At Retail
Goods available $ 20,500 $ 36,000
Add: Markups 3,000
Less: Markup cancellations ( 1,000)
Goods available $ 20,500 $ 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

3
 Retail Inventory Method
RATIO B: At Cost At Retail
Goods available $ 20,500 $ 36,000
Add: Net Markups 2,000
Less: Markdowns ( 2,500)
Markdown cancellations $ 2,000
Goods Available $ 20,500 $ 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) $36,000
Add: Net Markups 2,000
Less: Net Markdowns (500)
Net Goods Available (at retail) $37,500
Less: Net Sales (at retail) 25,000
Ending Inventory (at retail) $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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