Retail Inventory Method Concepts

The video tutorial explains the retail inventory method, a technique used to estimate the cost of goods sold and the value of closing inventory. It is recognized by US GAAP and can be used for federal income tax purposes. The tutorial outlines the steps to calculate the cost to retail ratio, cost of goods available for sale, cost of goods sold, and ending inventory. An example is provided to illustrate the method, and considerations for multi-product scenarios are discussed. The video concludes with assumptions and limitations of the method, emphasizing its reliance on consistent markup and accurate records.

What is the primary purpose of the retail inventory method?

• To assess the quality of inventory

• To calculate the profit margin

• To determine the retail price of goods

• To estimate the cost of goods sold and closing inventory

Which accounting standard allows the use of the retail inventory method?

• FASB

• IAS

• US GAAP

• IFRS

What is a key assumption for the retail inventory method to be effective?

• The company must have a diverse product range

• The company must use a specific identification method

• The company must have a high sales volume

• The company must maintain records for all purchases and opening inventory

How is the cost to retail ratio calculated?

• Cost multiplied by retail price

• Retail price divided by cost

• Retail price minus cost

• Cost divided by retail price, multiplied by 100

What components are needed to calculate the cost of goods available for sale?

• Closing inventory and sales

• Retail price and cost

• Opening inventory and purchases

• Sales revenue and cost to retail ratio

Which formula is used to determine the cost of goods sold?

• Sales revenue divided by cost to retail ratio

• Retail price minus cost

• Sales revenue multiplied by cost to retail ratio

• Opening inventory minus purchases

How do you estimate the value of ending inventory?

• Subtract cost of goods sold from cost of goods available for sale

• Multiply cost to retail ratio by sales

• Add sales revenue to opening inventory

• Divide retail price by cost

In the example provided, what is the cost to retail ratio?

• 50%

• 62.5%

• 100%

• 80%

What should be done first when using the retail inventory method for multiple products?

• Calculate the total sales revenue

• Determine the cost to retail ratio for each product

• Estimate the ending inventory

• Calculate the average cost

What is a limitation of the retail inventory method?

• It requires physical verification of inventory

• It assumes consistent markup across products

• It cannot be used for tax purposes

• It is not accepted by any accounting standards