4. Retail Inventory Method General Formulas

Goods available for sale at cost (retail inventory method)

Beginning inventory at retail + net purchases at retail

Net sales

Sales + employee discounts - sales returns

Estimated ending inventory at retail (retail inventory method)

Goods available for sale (at retail) - normal spoilage (if any) - net sales

Cost-to-retail percentage (retail inventory method)

Goods available for sale (at cost) / Goods available for sale (at retail)

Estimated ending inventory at cost (retail inventory method)

Estimated ending inventory at retail x cost-to-retail percentage.

Estimated Cost of Goods Sold (retail inventory method)

Goods available for sale at cost - estimated ending inventory at cost

Net markup

Amount above price after initial markup.

Net markdown

Amount below price after initial markup.

Net purchases at cost

Purchases + freight-in - purchase returns - purchase discounts.

Net purchases at retail

Total purchases at retail - purchase returns at retail.

What do we do with freight-in?

It is added to the cost amount.

What do we do with purchase returns?

It is deducted from both the cost and retail amounts.

What do we do with purchase discounts taken?

It is deducted from the cost amount

What do we do about abnormal shortages? (spoilage, breakage, theft)

Deducted from both the cost and retail amounts.

After calculating the cost-to-retail percentage, what do we do with net sales?

Net sales is deducted from goods available for sale at retail

After calculating the cost-to-retail percentage, what do we do with normal shortages?

Normal shortages are deducted from goods available for sale at retail