Retail Inventory Method

AAA

DEFINITION of 'Retail Inventory Method '

An accounting procedure for estimating the value of a store's merchandise. This method calculates a store's total inventory value by taking the total retail value of the items that were originally in inventory, subtracting the total sales, then multiplying that dollar amount by the cost-to-retail ratio (the percentage by which goods are marked up from their wholesale purchase price to their retail sales price).


This method really only provides an approximation of inventory value, however, as some items in a retail store will most likely have been shoplifted, broken or misplaced. Physical inventory must also be performed periodically to ensure the accuracy of inventory estimates.

INVESTOPEDIA EXPLAINS 'Retail Inventory Method '

The retail inventory method should only be used when there is a clear relationship between the price at which merchandise is purchased from the wholesaler and the price at which it is sold to the consumer. For example, if a clothing store marks up every item it sells by 100% of the wholesale price, it could accurately use the retail inventory method, but if it marks up some items by 20%, some by 35% and some by 67%, it can be difficult to apply this method with accuracy.

RELATED TERMS
  1. Atmospherics

    The controllable characteristics of a retail space that entice ...
  2. National Retail Federation - NRF

    A retail trade association with members from all phases of retail ...
  3. Carrying Cost Of Inventory

    This is the cost a business incurs over a certain period of time, ...
  4. Ending Inventory

    The value of goods available for sale at the end of the accounting ...
  5. Beginning Inventory - BI

    The book value of goods, inputs or materials available for use ...
  6. Inventory

    The raw materials, work-in-process goods and completely finished ...
Related Articles
  1. Measuring Company Efficiency
    Fundamental Analysis

    Measuring Company Efficiency

  2. Choosing The Winners In The Click-And-Mortar ...
    Investing

    Choosing The Winners In The Click-And-Mortar ...

  3. The 4 R's Of Investing In Retail
    Fundamental Analysis

    The 4 R's Of Investing In Retail

  4. Consumer Spending As A Market Indicator
    Markets

    Consumer Spending As A Market Indicator

comments powered by Disqus
Hot Definitions
  1. Walras' Law

    An economics law that suggests that the existence of excess supply in one market must be matched by excess demand in another ...
  2. Market Segmentation

    A marketing term referring to the aggregating of prospective buyers into groups (segments) that have common needs and will ...
  3. Effective Annual Interest Rate

    An investment's annual rate of interest when compounding occurs more often than once a year. Calculated as the following: ...
  4. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  5. Odious Debt

    Money borrowed by one country from another country and then misappropriated by national rulers. A nation's debt becomes odious ...
  6. Takeover

    A corporate action where an acquiring company makes a bid for an acquiree. If the target company is publicly traded, the ...
Trading Center