retail inventory method

Definition

Ending-inventory value estimation method based on the relationship between cost and retail price. It entails these steps: (1) maintaining detailed record of all purchases and on-hand goods at both cost price and retail price, (2) computing a cost-to-retail percentage (Formula: Cost price x 100 ÷ Retail price), (3) estimating ending-inventory at retail prices by subtracting the retail price of goods sold from the retail price of goods in inventory, and (4) converting the estimated inventory at retail price to cost price by applying the cost-to-retail percentage computed in step #2. Also called retail inventory estimation method.