The formulas
- Goods available at retail = beginning retail + purchases retail + net markups
- Ending retail = available - net markdowns - net sales
- Conventional ratio = (beginning cost + purchases cost) / available at retail
- Ending cost = ending retail x ratio
How it works
The retail inventory method converts ending inventory at retail to cost with a cost-to-retail ratio. Leaving markdowns out of the ratio (the conventional method) gives a lower ratio and approximates lower of cost or market.
ASU 2015-11 left inventory measured with the retail inventory method on the lower of cost or market test (ASC 330-10-35-1C), which the conventional ratio is designed to approximate.
Illustrative figures only. Check the result against your firm's methodology before relying on it.
Common questions
Why exclude markdowns from the ratio?
Including them raises the ratio and values inventory closer to average cost. Excluding them writes inventory down for the markdowns.
Where do employee discounts and shrink go?
Deduct them from goods available at retail, like sales, after the ratio is computed.
Is the method allowed for tax?
Yes, under the Treasury regulations on inventories, with its own rules. This tool computes the book figure.
Sources
Runs in your browser. The figures you type are not sent to CORAA or stored. Check the result against your firm's methodology before relying on it.