CHAPTER 14: Retail Inventory Method Items related to retail method

100 + 20 = 120 + 10 = 130 – 5 = 125 -10 = 115 + 2 = 117

Initial markup Original markup on COGS
Basic Formula Original retail Sales price goods are first
GAS at retail or selling price XX offered for sale
Additional markup Increase in sales price above
Less: Net Sales (Gross sales – Sale ret. XX original sales price
only) Markup cancelation Decrease in sales price but not
Ending inventory at selling price XX below sales price
Net additional/ net Markup minus markup
Multiply by cost ratio XX
markup cancelation
Ending inventory at cost XX Markdown Decrease in sales price below
the original price
Markdown cancelation Increase in sales price but not
GAS at cost
Cost Ratio = GAS at Selling price Net markdown
above the original sales price
Markdown minus markdown
cancelation
Maintained markup Difference between cost and
It is necessary that the GAS should be sales price after adjustment.
“Markon”
determined not only in terms of selling
price but also in terms of cost.
Illustration:
Cost 200
Treatment of items
Initial markup 40
Cost Only Cost and Retail
Original retail/ Sales price 240
Purchase Discount Purchase Return 60
Additional markup
Purchase Allowance Dept. transfer in/Dr. New sales price 300
Freight In Dept. transfer out/Cr. Markup cancelation 40
Abnormal SSSB New sales price (not below org. sales price) 260
Net markup (60-40) 20
Sales Retail If at this point, the item is marked down to 210 Markup cancelation
20
Sales Return Normal SSSB Markdown (decrease below original price) 30 50
Employee Discounts New sales price 210
Markdown cancellation (increase in sales
price but not above the org. sales price 240) 20
Illustration:
New sales price 230
Cost Retail
150,000 230,000 Net markdown (30 – 20) 10
Beg. Inventory
Maintained markup (230 - 200) 30
Purchases 400,000 650,000
Freight in 10,000
Purchase ret. (55,000) (80,000)
Purchase all. (5,000)
Purchase disc. (20,000)
GAS 480,000 800,000
Cost Ratio (480,000/800,000)
= 60%
Less: Sales 630,000
Sales ret. (30,000) 600,000
End. Inventory at Retail 200,000
End. Inventory at Cost
(200,000 x 60%) 120,000
Approaches in the use of retail method
Conservative Average Cost FIFO Approach Computation using FIFO retail
Approach Cost Retail
Known as lower Average percentage for Current cost ratio is Beginning inventory xx xx
of average cost each retail department is determined every year Purchases xx xx
or market. often used. considering net purchases Net markup xx
and excluding beginning
Net markdown (xx)
inventory.
Includes net Includes both net Includes both net markup
Net purchases xx xx
markup; excludes markup and net and net markdown in Cost ratio (cost/retail) = xx%
net markdown in markdown in determining cost ratio. GAS (Beg. + Net purchases) xx xx
determining cost determining cost ratio. Less: net sales (xx)
ratio.
Ending inventory at retail xx
Lower than the The reason is to arrive at Based on the assumption
average cost. an inventory that will that markup and markdown
approximate or equal to apply to goods purchased FIFO cost (ending inventory) (xx%) xx
historical cost. during the year and not
beginning inventory. Computation of COGS
Marked down to below
GAS xx
the original selling price
Shall be applied in FIFO cost (xx)
conjunction with the COGS xx
retail inventory method.

Conservative and Average Cost

Cost Retail
Beg. Inventory xx xx
Net purchases xx xx
Additional markup xx
Markup cancellation (xx)
GAS-conservative xx xx
Cost ratio (cost/retail) = XX%
Markdown (xx)
Markdown cancellation xx
GAS-average xx xx
Cost ratio (cost/retail) = XX%
Less: Sales xx
Sales ret. (xx)
Employee disc. xx
Spoilage and breakage xx xx
Ending inventory at retail xx

Conservative cost (ending inventory)( xx%) xx

Average cost (ending inventory)(xx%) xx
Ending inventory at retail is same for conservative and
average.

Computation of COGS
Conservative Average
GAS xx xx
Ending inventory (xx) (xx)
COGS xx xx