RETAIL
TREATMENT OF ITEMS
a. Purchase discount – deducted from purchases at
INVENTORY cost only.
b. Purchase return - deducted from purchases at
METHOD
cost and at retail.
c. Purchase allowance - deducted from purchase at
cost only.
A METHOD OF ESTIMATING THE VALUE OF INVENTORY
FAR | CHAPTER 14 d. Freight in – addition to purchases at cost only.
DEFINITION OF RIM e. Department transfer in or debit – addition to
purchases at cost and at retail.
• PAS 2, Paragraph 22, provides that this method is
often used in the retail industry for measuring f. Department transfer out or credit – deduction
inventory of large number of rapidly changing from purchases at cost and at retail.
items with similar margin for which it is
impracticable to use other costing method. g. Sales discount and sales allowance –
disregarded, meaning, not deducted from sales.
• Generally employed by department stores,
supermarkets and other retail concerns where h. Sales return - deducted from sales.
there is a wide variety of goods because keeping
track of unit cost at all times is difficult. If the account is “sales return and allowance”, the
same should be deducted from sales.
• Selling price or retail price is tagged to each item.
i. Employee discounts – added to sales.
INFORMATION REQUIRED Employee discounts are special discounts usually
not recorded because the employee discounts are
The use of the retail inventory method requires that records directly deducted from the sales price.
be kept which must show the following data:
Only the net sales price is recorded. Consequently,
a. Beginning Inventory at cost at retail price. the amount of sales is understated. Thus, the
b. Purchases during the period at cost and at retail employee discounts are added back to sales.
price.
c. Adjustments to the original retail prices such as j. Normal shortage, shrinkage, spoilage,
additional markup, markup cancelation, breakage – deducted from goods available for
markdown and markdown cancelation. sale at retail.
d. Other adjustments such as department transfer,
breakage, shrinkage, theft, damaged goods and Any normal shortage is usually absorbed or
employee discount. included in a cost of goods sold.
BASIC FORMULA k. Abnormal Shortage, shrinkage, spoilage,
breakage - The amount is deducted from goods
The difference under the gross profit method is that, the available for sale at both cost and retail so as not
ending inventory is stated at cost while under the retail to distort the cost ratio.
inventory method, the ending inventory is expressed in
terms of selling price. Any abnormal is reported separately as loss.
Goods available for sale at retail or selling price xx
Net Sales (Gross sales minus sales return only) (xx) ITEMS RELATED TO RETAIL METHOD
Accordingly, in the determination of the inventory at retail
Ending Inventory at selling price xx and for purposes of computing the cost ratio, the following
Multiply by cost ratio xx items should be considered.
Ending inventory at cost xx The original sales price is frequently raised or lowered
particularly at the end of selling season where replacement
costs are changing.
Cost Ratio = Goods available for sales at cost
a. Initial Markup – original markup on the COGS.
Goods available for sale at selling price b. Original Retail – the sales price at which the goods
are offered for sale.
c. Additional Markup – increase in sales price above
the original sales price.
d. Markup Cancelation - decrease in sales price that
does not decrease the sales price below the
original sales price.
e. Net additional markup or net markup – markup
minus markup cancelation.
f. Markdown - decrease in sales price below the
original sales price.
g. Markdown cancelation - increase in sales price
that does not increase the sales price above the
original sales price.
h. Net Markdown – markdown minus markdown
cancelation.
i. Maintained Markup – difference between cost
and sales price after adjustment for all of the
above items.
Sometimes, maintained markup is referred to as
“markon”.
FIFO AND LIFO RETAIL APPROACH
APPROACHES IN THE USE OF RETAIL METHOD
The FIFO retail and LIFO retail are similar to the average
To obtain the appropriate inventory value under the retail cost approach in that both net markup and net markdown
inventory method, four approaches are followed, namely. are considered in computing the cost ratio.
a. Conservative or conventional or lower of cost and However, a current cost ratio is determined every year
net realizable value approach considering the net purchases during the current year only
b. Average cost approach and excluding the beginning inventory.
c. FIFO approach
d. LIFO approach The FIFO retail and LIFO retail are based on the assumption
that markup and markdown apply to goods purchased
IFRS expresses prohibits LIFO. However, the LIFO retail during the current year and not to beginning inventory.
approach is exemplified for comparative purpose.