Estimating Inventory Using the Retail Method

The two generally accepted methods for estimating the value of an inventory are the retail method and the gross profit method. For these methods to closely approximate the actual value of inventory, the markup rate for all items bought and sold by the company must be consistent. If they are not, the estimates should be calculated separately for each product category.

The retail method of inventory estimation is used by retail businesses of all types and sizes. To use this method, the company must have certain figures in its accounting records, including beginning inventory at cost price and at retail, purchases during the period at cost price and at retail, and net sales for the period.