Retail inventory method definition including break down of areas in the definition. Analyzing the definition of key term often provides more insight about concepts. Retail inventory method can be defined as: Method for estimating ending inventory based on the ratio of the amount of goods for sale at cost to the amount of goods for sale at retail. Retail inventory method is a way to estimate ending inventory by using the relationship between retail price and cost, retail inventory method first calculating the ration of cost to retail price and the then the retail inventory method multiplies this amount to the retail sales number to arrive at estimated cost of goods sold. We can then compare cost of goods sold to the cost of goods available for sale to estimate ending inventory. The retail inventory method should not be used a replacement for a physical count but can be useful in making an estimate of what ending inventory should be.
