1. Chapter Appendix 8A
The Retail Inventory Method of Estimating Inventory Costs
Prepared by:
Dragan Stojanovic, CA Rotman School of Management, University of Toronto

2. Retail Inventory Method:
Given: At Cost At Retail
Goods available $ 20, $ 36,000
Markups $ 3,000
Markup cancellations $ 1,000
Markdowns $ 2,500
Markdown cancellations $ 2,000
Sales (net) $ 25,000
Compute the cost-to-retail ratios

3. Retail Inventory Method
RATIO A: At Cost At Retail
Goods available $ 20,500 $ 36,000
Add: Markups ,000
Less: Markup cancellations ( 1,000)
Goods available $ 20, $ 38,000
Cost-to-retail ratio ($20,500 ÷ $38,000) = 53.9%
Ratio A (Conventional retail inventory method) reflects a cost % that includes net markups but excludes net markdowns

4. Retail Inventory Method
RATIO B: At Cost At Retail
Goods available $ 20, $ 36,000
Add: Net Markups ,000
Less: Markdowns ( 2,500)
Markdown cancellations $ 2,000
Goods Available $ 20, $ 37,500
Cost-to-retail ratio ($20,500 ÷ $37,500) = 54.7%
Ratio B incorporates both net markups and
net markdowns

5. Retail Inventory Method: Calculating Ending Inventory
Ending Inventory (at cost) =
Ending Inventory at Retail x Cost to Retail Ratio
Goods Available (at retail) $36,000
Add: Net Markups ,000
Less: Net Markdowns (500)
Net Goods Available (at retail) $37,500
Less: Net Sales (at retail) 25,000
Ending Inventory (at retail) $12,500
Ratio A = $12,500 x 53.9% = $6,737.50
Ratio B = $12,500 x 54.7% = $6,837.50

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