 Hello in this lecture we will define retail inventory method. According to fundamental accounting principles, while 22nd edition the definition of retail inventory method is method for estimating ending inventory based on the ratio of the amount of goods for sale at cost to the amount of goods sale at retail. So remember what the goal is here. We're trying to estimate what the ending inventory is either because we have not yet done a physical count or possibly because we're going to do a physical count and we want to compare the ending inventory number we come up with with an estimate such as this to what we have in the physical count possibly to look for items such as shrinkage or spoilage or things like that that may have happened. So in order to do this let's take a look at an example. First we're going to calculate the cost to retail percentage. So we could take that by the cost per unit. This is going to be the cost per unit of the inventory that we are purchasing then marking up and selling dividing that by the sales price per unit. So we're comparing the cost per unit divided by the sales price per unit giving an example of 140 cost compared to a sales price of 200. We're buying them for 140 we're selling them for 200 that means that we have a 70 percent cost to retail percentage. If we take that number then and we take the total sales remember we know what total sales is because that's what's being calculated when we make the sale. So we have the total sales number if we multiply the total sales number by this 70 percent then the cost to retail percent then we can estimate that the cost of goods sold then should be 168 000. So we know what the sales are we're estimating the cost of goods sold based on the relationship between the cost per unit and the sales price. Now that we have the estimated cost of goods sold we can calculate indeed inventory by taking beginning inventory which we know from last period plus the purchases which we know what purchases are because they are what they are that's what we pay for it. That gives us the cost of goods available for sale then we're going to take the the estimated cost of goods sold that we just calculated and if we subtract that out then we're going to have the estimated ending inventory. Notice this calculation here is really the calculation for cost of goods sold that you're probably familiar with except that we reversed these last two items meaning the cost of goods sold's calculation is usually beginning inventory plus purchases means we have the cost of goods that were available to sale and then we usually subtract out the cost of the ending inventory to arrive at cost of goods sold in this case we're doing that in reverse because we estimated what the cost of goods sold are and therefore we're reversing this last part of the calculation in order to then determine what the ending inventory could be in estimate.