Q. Steps used in retail inventory method?
The retail inventory method approximation the cost of the ending inventory by applying a cost/retail price ratio to ending inventory stated at retail prices. The benefit of this method is that companies can estimate ending inventory (at cost) without taking a physical inventory. Therefore the use of this estimate permits the preparation of interim financial statements monthly or quarterly with no taking a physical inventory. The key elements for finding the ending inventory by the retail inventory method are
- Total the beginning inventory as well as the net amount of goods purchased during the period at both cost and retail prices.
- Divide the cost of goods obtainable for sale by the retail price of the goods available for sale to find the cost/retail price ratio.
- Subtract the retail sales from the retail price of the goods available for sale to determine ending inventory at retail.
- Multiply the cost/retail price ratio or else percentage by the ending inventory at retail prices to reduce it to the ending inventory at cost.