Chapter 14: Retail Inventory Method 9.

Maintained markup or markon –

difference between cost and sales price
after adjustment for all of the above
RETAIL INVENTORY METHOD items
- Generally used by department stores
and supermarkets where there is a wide
variety of goods; ILLUSTRATION
- Keeping track of unit cost at all times is
tedious Cost 200
1
- The selling price or retail price is tagged Initial markup + 40
2
to each item; Original retail/Sales price 240
3
- Retail means selling price Additional markup + 60
New sales price 300
4
BASIC FORMULA Markup cancelation - 40
Goods available for sale, @retail xx New sales price (not below 240) 260
Less: Net sales (Gross sales – sales return) xx Markup cancellation - 20
6
Ending inventory, @retail xx Markdown - 30
Multiplied by: Cost ratio* xx New sales price 210
7
Ending inventory, @cost xx Markdown cancelation + 20
New sales price (not above 240) 230

COGAS , @cost Additional markup 60

* Cost ratio=
COGAS , @retail Markup cancellation - 40
Markup cancellation - 20
5
ITEMS RELATED TO RETAIL METHOD Net markup 0
1. Initial Markup – original markup on the
cost of goods Markdown 30
2. Original Retail – The sales price at which Markdown cancellation - 20
8
the goods are first offered for sale Net markdown 10
3. Additional markup – Increase in sales
price above the original sales price New sales price 230
4. Markup Cancellation – decrease in sales Cost - 200
9
price that does not decrease the sales Maintained markup 30
price below the original sales price
5. Net additional markup or net markup –
markup minus markup cancellation
6. Markdown – decrease in sales price APPROACHES IN THE USE OF RETAIL METHOD
below the original sales price  Conservative or conventional or lower
7. Markdown cancellation – increase in of cost approach – excludes markdown
sales price that does not increase the and markdown cancellation
sales price above the original sales price  Average cost approach – includes
8. Net Markdown – Markdown minus markdown and markdown cancellation
markdown cancellation
  FIFO approach – includes markdown
and markdown cancellation; excludes DEFINITION OF TERMS AND TREATMENT
the beginning inventory  Employee Discounts
– special discounts that are not
recorded in the sales discounts
PAS 2 recommends:
account because they are directly
The average cost approach shall be deducted from the sales price
applied in conjunction with the retail - Added back to sales because these
inventory method discounts decrease sales, but they
do not affect physical inventory

COMPUTATION  Normal SSSB (shortage shrinkage,

COST RETAIL spoilage, breakage)
Beg. inventory x x - deducted from goods available for
Purchases x x sale @retail
Freight in x - Absorbed or included in cost of
Purchase return (x) (x) goods sold
Purchase allowance (x)
Purchase discount (x)  Abnormal SSSB (shortage shrinkage,
Additional mark-up x spoilage, breakage)
Markup cancellation (x) - Usually arise from theft or casualty
Departmental transfer in - Deducted from goods available for
- debit x x
sale @cost & @retail before the
Departmental transfer
calculation of cost ratio
out - credit (x) (x)
- Reported separately as loss,
Abnormal SSSB (if any) (x) (x)
separate from cost of goods sold
Goods available for sale –
FIFO (exclude beg. inv.) x x
Goods available for sale – COMPUTATION OF NET PURCHASES
Conservative (include Cost Retail
beg. inv.) x x Purchases x x
Markdown (x) Freight-in x
Markdown cancellation x Purchase (x) (x)
Goods available for sale - returns
Average x x Purchase (x)
Less: Sales x allowance
Sales return (x) Purchase (x)
Employee Disc. x discount
Spoil. & Break. x (x) Net purchases x x
Ending inventory @ retail x
Multiplied by: Cost ratio COMPUTATION OF NET SALES
(FIFO/Cons./Ave) x% Sales x Notice that
Ending inventory @ cost x only the sales
Sales return (x)
return are
Employee Discounts x deducted. The
Normal Spoilage x rest are
Net sales x added
---------------------------------------------------------------
Notes:
 Round off cost ratio to the nearest
percent, unless otherwise stated
 Do not disregard COGAS @cost. This will
be used for the computation of COGS
 Ignore sales discount and sales
allowances
 Inventory shortage – sales price is added
to sales
 The exclusion of markdown and
markdown cancellation (Conservative &
FIFO approach) is for the purpose only of
cost ratio computation.
 The exclusion of beginning inventory
(FIFO approach) is for cost ratio
computation only; it will still form part of
the Cost of Goods Available for Sale
computation