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. Inventory

    The raw materials, work-in-process goods and completely finished ...
  4. Beginning Inventory - BI

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

    The value of goods available for sale at the end of the accounting ...
  6. Carrying Cost Of Inventory

    This is the cost a business incurs over a certain period of time, ...
Related Articles
  1. Fundamental Analysis

    Measuring Company Efficiency

    Three useful indicators for measuring a retail company's efficiency are its inventory turnaround times, its receivables and its collection period.
  2. Investing

    Choosing The Winners In The Click-And-Mortar Game

    E-tailing has changed the way consumers do nearly everything. Do you know how to pick the best retailer?
  3. Fundamental Analysis

    The 4 R's Of Investing In Retail

    In retail, successfully managing return on investment (ROI) and other financial indicators is the key to a healthy business.
  4. Markets

    Consumer Spending As A Market Indicator

    What people buy and where they shop can provide valuable information about the economy.
  5. Fundamental Analysis

    Analyzing Retail Stocks

    To analyze retail stocks, investors need to be aware of the most common metrics used. Find out what they are.
  6. Economics

    Evaluating Grocery Store Stocks

    Retail grocers are no longer a homogeneous group selling products in the same manner. Find out how to evaluate these companies.
  7. Investing

    What's a Debit Note?

    A debit note is a document used by a seller to inform a purchaser of a dollar amount owed. As the name indicates, it is a note from the seller that a debit has been made to the purchaser’s account. ...
  8. Investing

    What's Capitalization?

    Capitalization has different meanings depending on the context.
  9. Fundamental Analysis

    The Best 5 Online Accounting Systems For Small Business

    Running a small business can be difficult, but thanks to these online accounting services, taking care of payroll doesn't have to be.
  10. Investing

    Understanding Cost Accounting

    Cost accounting is the method of financially allocating expenses to goods that are manufactured for resale. Cost accounting is also referred to as managerial accounting, because managers use ...

You May Also Like

Hot Definitions
  1. Efficiency Ratio

    Ratios that are typically used to analyze how well a company uses its assets and liabilities internally. Efficiency Ratios ...
  2. Fixed Cost

    A cost that does not change with an increase or decrease in the amount of goods or services produced. Fixed costs are expenses ...
  3. Subsidy

    A benefit given by the government to groups or individuals usually in the form of a cash payment or tax reduction. The subsidy ...
  4. Sunk Cost

    A cost that has already been incurred and thus cannot be recovered. A sunk cost differs from other, future costs that a business ...
  5. Technical Skills

    1. The knowledge and abilities needed to accomplish mathematical, engineering, scientific or computer-related duties, as ...
  6. Prepaid Expense

    A type of asset that arises on a balance sheet as a result of business making payments for goods and services to be received ...
Trading Center