Answer
The retail inventory method can be employed to estimate wholesale, retail, and manufacturing finished goods inventories.
The valuation of inventory under this method is arrived at by reducing the ending inventory at retail to an estimate of the lower of cost or market.
The retail value of ending inventory can be computed by:
1. Taking a physical inventory
2. Subtracting net markdowns and sales from the total retail value of merchandise available for sale. This refers to the sum of beginning inventory at retail, net markups, and net purchases at retail.
Work Step by Step
The reduction of ending inventory at retail to an estimate of the lower of cost or market is accomplished by applying to it an estimated cost ratio arrived at by dividing the retail value of merchandise available for sale.
