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Today is 10/20/2022 Free Resources Loading... Subscriptions Loading... CONTACT USAMERICAS:400 S. Maple Avenue, Suite 400 Falls Church, VA 22046 United States INTERNATIONAL:Nieuwezijds Voorburgwal 104/108 1012 SG Amsterdam The Netherlands PHONE:800-955-2444CONNECT:Tax Analysts is a tax publisher and does not provide tax advice or preparation services.POPULAR TAX TOPICS© Tax Analysts 2022. | 400 S. Maple Avenue, Suite 400, Falls Church, VA 22046 Companies have used the retail method of inventory accounting for many years. According to the Committee on Ways and Means, the retail inventory method has been the best accounting method since 1941. Professor N.P. McNair wrote the first major book detailing the pros of using this method. While some have begun to question the usefulness of this method in recent years, due to advances in tracking costs and inventory, as Smyth Retail points out, it's still used with efficiency by many businesses today. Basics of the Retail MethodThe retail inventory method is one of only two methods accepted for tax reporting purposes and accepted by the American Institute of CPAs under the Generally Accepted Accounting Principles. The direct cost method comprises the other accepted method. RIM also stands as the most widely used method by merchandising companies to calculate inventory values. According to California State University Northridge, the retail method is especially useful for quarterly financial statements. It is based on the relationship between the merchant's cost and the retail prices of inventory. Additional factors, like mark-ups and mark-downs, as well as employee discounts must be factored into the calculations. However, before you can do that, you need to understand the basics of the retail method. The Cost/Retail RatioThe cost/retail ratio makes up one of the main components used to calculate the retail inventory method. Two methods exist for calculating the cost/retail ratio. The first method, called the conventional retail method includes markups but excludes markdowns. This method results in a lower ending inventory value. The second method, simply called the retail method, uses both markups and markdowns to calculate the ratio. This method results in a higher-ending inventory value. Retail Inventory Method FormulaWhen using the conventional retail inventory method for inventory costing, the following data inputs create the cost/retail ratio formula: beginning inventory at cost and retail, purchases at cost and retail plus the retail value of any markups:
The product of this calculation equals the cost/retail ratio. For example beginning inventory values are $10,000 at cost and 20,000 at retail, purchases total $40,000 at cost and $80,000 at retail and markups totaled $6,000 at retail. $10,000 + $40,000 = $50,000 total value at cost. $20,000 + $80,000 + $6,000 = $106,000 total value at retail. $50,000 / $106,000 = 0.472 for a cost/retail ratio of 47 percent. The Retail Method In ActionOnce the cost/retail ratio gets determined the small business owner uses that ratio to value his period-end inventory. Using the $50,000 total inventory value at cost and the $106,000 total inventory value at retail, the owner now subtracts all sales and any markdowns from the total inventory value at retail. This gives the owner a total ending inventory value at retail selling price. To determine the total ending inventory value at cost, the owner multiplies the ending inventory value at retail selling price times the cost/retail ratio. For example, if sales total $75,000 and markdowns totaled $9,000 he subtracts these numbers from the $106,000 leaving $22,000 in ending inventory value at retail. He then multiplies the $22,000 times the cost/retail ratio of 47 percent and gets an ending inventory value at cost of $10,340 ($22,000 x 0.47 = $10,340.) Because the retail inventory method uses weighted averages to calculate the ending values it does not represent an exact cost value of the inventory. Also, because it uses markdowns, this method gives the most conservative value for inventory valuation. In practice, the retail inventory method, with markups and markdowns, can become complicated to figure out, so it's best to track these using a database or, at the very least, a spreadsheet. Which of the following is a major advantage of the retail inventory method?An advantage of the retail inventory method is that it does not require a physical inventory. The retail inventory method only requires an organization to record the retail prices of inventory items.
Which of the following would not likely be reported as inventory?(d) Machinery for use in the production process is a fixed asset and not inventory. The correct answer is Option (d). Machinery used in the production process will not be classified as inventory.
What is needed to find the cost of ending inventory in the retail inventory method quizlet?(4) Compute ending inventory by subtracting cost of goods sold from total goods available for sale.
Should not be taken into account when determining the cost of inventory?Do not add any administrative or selling costs to the cost of inventory. The costs that can be included in an inventory valuation are direct labor, direct materials, factory overhead, freight in, handling fees, and import duties.
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Which information would not be needed to determine inventory based on the retail method?
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