Retail Inventory Method Step 3 Cost to retail ratio Ending inventory at retail Estimated ending inventory at cost = × Step 2 Goods available for sale at retail Goods available for sale at cost = ÷ Cost to retail ratio Step 1 Net sales at retail Goods available for sale at retail – = Ending inventory at retail
Estimate ending inventory by applying the gross profit ratio to net sales at retail.
Useful when inventories have been destroyed, lost or stolen.
Example: Gross Profit Method Assume the following data: Beginning inventory, January 1 Rs. 25,000 Purchases, January 1 through January 31 40,000 Sales, January 1 through January 31 50,000 Historical gross profit percentage 40%
Gross Profit Method Sales (actual) Rs. 50,000 100% Gross profit (estimate) Rs. 20,000 40% Cost of goods sold (estimate) Rs. 30,000 60% Beginning inventory (actual) Rs. 25,000 + Purchases (actual) 40,000 = Cost of goods avail for sale (actual) 65,000 = Ending inventory (estimate) 35,000 - Cost of goods sold (estimate) 30,000
Standard costs take into account normal levels of consumption of materials and supplies, labour, efficiency and capacity utilisation. They are regularly reviewed and, if necessary, revised in the light of current conditions.
Under this method, the cost of goods sold/issued is calculated at the standard cost and at the end, any variance, if any, needs to be adjusted.
What are the impact of ERRORS in Inventory Valuation ?
Ending Inventory Errors If ending inventory is ... Cost of Goods Sold is ... Profit is ... Overstated Understated Overstated Understated Overstated Understated
How to REPORT Value of Inventory in Financial Statements ? Indian Accounting Standard – AS 2