 Hello and welcome to the session in which we would look at the retail method. It's a method used by, guess what, retailers like Best Buy, Staples, any place where they sell to customers, large retails, big box stores, that's the value inventory without the physical count, very similar to the concept of the gross profit margin method or the gross profit percentage method. Now, why would they do that? What's the purpose? Well, if they want to have a quick computation of their profit without taking a physical count, sometimes they want to estimate inventory shortage or guesstimate or sometimes they need this information for insurance purposes, but they don't want to go through the count. So it's a way to estimate what information is needed to get this method done. Well, you will need the cost and retail value of goods purchased. Now, the cost, we know what cost is, what the company paid for an item. Retail is how much they're selling it for. So when you walk into a store and you see an item for $50, that's the sales price and that's or the retail. Now, this item might have cost the company, cost the company, maybe $25. But the retail price is 50. So we need that information. So we need to find out what is the cost and retail value of goods available for sale. And hopefully we all know what goods available for sale, which is beginning inventory plus purchases. Then we need the information about sales. How much sales did we accounted for this period? And that's easy. We're just going to look up our sales. We might have additional information to discuss about the computation. So there are more, more items to be aware of when we're computing the retail method inventory. Now, the retail method comes in different flavors. We have the conventional, we have Lyfa, we have other method. In this session, I'm going to be covering the conventional method. If you understand the conventional method, I'm going to explain all the different items, all the different pieces. Then you'll be able to understand the other method. Now, the best way to illustrate this is to work an example. Before we look at an example, I would like to remind you whether you are an accounting student or a CPA candidate to take a look at my website, farhatlectures.com. I don't replace your accounting review course nor your accounting course. I'm a useful addition. I can help you understand the material better in addition to your review course, in addition to your classes. I provide alternative explanation, alternative resources, lectures, multiple choice. Your risk is one month of subscription. Your potential gain is increasing your score on the CPA exam and passing. If not for anything, take a look at my website to find out how well or not well your university doing on the CPA exam. This is a list of my course catalog. I do have advanced accounting, cost accounting, intermediate, governmental tax, so on and so forth. My CPA supplemental material are aligned with your backer. Roger, Wiley, Gleam, so on and so forth. So it's very easy to go back and forth between my material and your CPA review course. As I mentioned, I give you access to almost 1500 AICPA previously released questions with detailed solution. If you haven't connected with me on LinkedIn, please do so. Take a look at my LinkedIn recommendation like this recording. Share it with other connect with me on Instagram, Facebook, Twitter and Reddit. So let's start with a simple example, but it will illustrate the big concept and we would look at a more detailed example. So we're going to have a cost column and retail column. Cost column is keep and track of cost information. Retail column is keep and track of the retail retail numbers. For example, we have a company with a beginning inventory of $350 under cost. That same inventory at retail, they sell it at 500. They purchased 4,000 worth of inventory. They can sell it at retail for 6,000. Well, now we have goods available for sale, cost versus retail. Well, now what we can do is we can take the cost divided by retail. And what we find out is approximately 66.92. So cost represent almost, let's round it to 67%. Let's assume we had sales of 2,500 and sales obviously only at retail because you don't have sales at cost. So if we sold 2,500 of our 6,500 retailed, what we're going to be left with is $4,000 ending inventory at retail. Well, if we have 4,000 ending inventory at retail and we know cost a 60% of that, well, if we take 4,000 times 66.92%, it's going to give us $2,676.92 estimating ending inventory. How did we do so? By looking at inventory at retail, then multiplying it by cost to retail ratio. Now, you might say, well, this is pretty straightforward. It is until you introduce more items that you have to account for. So what we looked at is a simple example. Let's go ahead and do the same thing, including other items that could, that retailers would have and we need to know how to deal with those items. Starting with beginning inventory, for this example, we have 600 cost 1,000 retailed, pretty straightforward. Next, we looked at purchases. We have 20,000 in purchases and at cost and 34,000 at retailed, which is, that's pretty straightforward. We saw this in the prior, on the prior slide. Now we have a purchase return. We have purchase return, we have the information at cost and we have the information at retail. Purchase return, obviously they're going to reduce your purchases and they are going to reduce your retail because when they return something, you put it back into purchases and it's going to be reducing your retail as well. So notice purchases is a negative. In other words, we are reducing both cost and retail. So this is the purchases. So the next thing we're going to look at is freight. Freight is $500. Well, freight is transportation. Do we have any information about freight? Do we say, well, we paid 500 in freight. Now the freight at retail is such and such. No, we don't sell freight, right? So only the freight under the cost number. And this is basically what you are familiar with. Those are the items that you are familiar with. When you compute, what is our purchases, which is beginning inventory plus purchases plus freight and minus purchase return. And we have the information here at retail. But now we're going to be introducing a few more items. Okay, starting with, let's see, starting with abnormal shortage. What are abnormal shortage? Abnormal shortage is somehow we incurred losses. We lost some inventory and it's not normal. It was abnormal. And as a result, that inventory is no longer with us. Just we lost it. So what's going to happen if we have any abnormal shortages? We're going to reduce them from the cost column and from the retail column. So they have a cost. Obviously, those inventory will have a cost and they'll have a retail value. We'd reduce them from both. Then what happens sometime, the company might have a markup. What is a markup? When the company sees that there's a lot of people are buying this product, what they do is they increase the price. Then sometime, what's going to happen is, when after they increase the price, if they see that the demand slowed down, what they do is they have a markup cancellation. They mark it up. So they increase the retail prices by 3,000. They reduce it by 1,000. The net is 2,000. But that's a net positive. So net markup is 2,000. So what we're saying is this. And why did I put all these items in red? All these items that are in red, they go into the calculation of total cost and total retail column. That's why they are all in red. Now, once I know my total cost and my total retail from these items, which is what I purchased, including the abnormal, if I take it into account, the abnormal shortage and the net markup, then I'm ready to compute my cost to retail percentage. Cost 17,500 divided by the retail, which is 29,000 tells us our cost to retail ratio is 60%. Simply put, we have in the store. If we look at the store right now, simply put, we have 29,000 worth of goods at retail. Those will have a cost of 17,500. Now we have additional information. Now we have a markdown. Well, we have it when there's a slowdown in selling something, the company will mark it down. Okay, this is different than markup. Markup is when they increase the price. Markdown is, let's assume we start at $10. We increase the price to 12, that's a markup. Then we reduce it to 11. That's a markup cancellation. But if we start at 10 and we reduce it to nine, then that's a markdown. Then we bring it back from 9 to 950. It's a markdown cancellation. Okay, so now we have a markdown and markdown cancellation. Markdown is 2,500, then we cancel 2,000 of it. So the net is 500. Markdown, remember negative because it's marking down your retail. You mark down your retail. You don't mark down your cost. And notice the same thing with the markup. You don't mark up your cost. You mark up and mark down your retail numbers because the cost is the cost. You don't change the cost. Then we have sales and sales return. Sales and sales return. Now, these are under the cost column, but doesn't mean they're under the cost column. Just I'm having them in there to get you to the net figure. Okay, so the net sales is 19,000. Well, obviously sales is only retail number. It's not, doesn't have cost information. Then we have what's called normal spoilage or normal losses. Normal spoilage or normal shortage are considered like sales. Therefore, they are listed here only under the retail. So notice the difference between normal and abnormal. Under the abnormal, we account for the cost and we account for the retail because it's abnormal. It will affect the ratio. It's going into the ratio. That's why we account for both. Employee discounts. When we give discounts to employee, we consider those as sales, just like sales. They're reducing our retail. Then we have, if we have 29,000 of items at retail and we sold, including markdown this much, what's left ending at retail is 74,000. Now, this is the ending inventory at retail. We don't report ending inventory at retail. We have to convert ending inventory at retail to ending inventory at cost. How do we do so? We multiply the 7400 by 60 percent and we find out our ending inventory at the conventional method or lower of cost or average is 4466. And this is how we estimate our inventory using the retail method. Now, as I told you at the beginning, there's more than one version of this. But once you understand this version, once you understand what goes in here, sometimes what they do, they include the markdown in other methods. They include the markdown in the ratio. So the markdown will be included here. Again, if you want to look at different methods, make sure, you know, if that's what's needed, look in your textbook, look in your CPA review course. But once you know this, I can assure you you can work with the other. You can convert really quick. There's one or two steps different. At the end of this recording, I'm going to tell you to really understand this. You've got to work multiple choice, see additional illustration. And what you should do is take a look at my website, farhatlectures.com. I'm going to help you do better on your CPA exam by helping you understand the material better. Keep your CPA review course. You need it. Just use me as a supplemental and you will be fine. You will add 10 to 15 points. Good luck. Study hard. And of course, stay safe.