What is the Retail Inventory Method?

The retail inventory method is an accounting method used in calculating the total inventory or merchandise held by a store. To determine the retail value of the merchandise of a business, the total retail value of the beginning inventory and the value of goods purchased must be known. 

The total amount of sales is subtracted from the total retail value of the beginning inventory them multiplied by the cost-to-retail-ratio in order to determine the total inventory of a store. 

The retail inventory method gives an insight into the estimated inventory value of a store, this means that the value cannot be accurate given certain factors such as some of the inventory being damaged, misplaced, or broken.

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How Does the Retail Inventory Method Work?

The retail inventory method is an important accounting method that helps retailers estimate their ending inventory balances and also resell their leftover merchandise. Another reason a retail inventory method id used is when a retailer needs to reconcile the price merchandise is bought from the wholesale and the price at which it is sold to customers. Hence, it is correct to say that the retail inventory method is used to estimate the ending inventory of a store and also the costs of items sold. This method is a practical method that helps retailers track their inventory or merchandise.

Drawbacks of the Retail Inventory Method

Despite the benefits of the retail inventory method to retailers, it has some drawbacks such as;

• The retail inventory method only provides an estimate of the inventory of a store and not the accurate figure.
• Hence, when contrasted with the physical inventory count of a store, there will be a difference because this method fails to account for inventories shoplifted, goods misplaced and those damaged or broken.
• A consistent markup of items sold is crucial when the retail inventory method is used.
• The retail inventory method is ineffective if an acquisition of merchandise is made and the acquiree holds large amounts of the inventory at a different markup stage used by the acquirer.

Related Topics

• Do It Right the First Time (DRIFT) Definition
• What is Merchandise Inventory (Retail Inventory Method)? – Financial Accounting
• What are Inventory Costs (Carrying Costs)? – Financial Accounting
  
  • Obsolete Inventory Definition
  • Shrinkage (Inventory) Definition
• Specific Identification Method of Accounting for Inventory – Financial Accounting
• First-in, First-Out Method (FIFO) – Financial Accounting
• Last-In, First-Out Method (LIFO) – Financial Accounting
• Weighted-Average Method of Accounting for Inventory – Financial Accounting
• Financial Statement Effects (Inflationary vs Deflationary Periods) – Financial Accounting
• Intermittent Purchase and Sell
• Choosing an Accounting Method – Financial Accounting
• Effect of Each Accounting Method on Taxes – Financial Accounting
• Lower of Cost or Market Method of Accounting for Inventory – Financial Accounting