Retail Inventory Method

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.