Under the retail method, you take the total retail selling price of each item in inventory and reduce it by the average margin, expressed as a percentage of the selling price, to determine the approximate cost of the item.
To determine the value of the ending inventory under the retail method, you need to:
Calculate the average percentage markup.
Add up your total retail selling prices of the goods you had in your opening inventory and your total retail selling prices of all the goods you purchased during the year, adjusting the prices for any markups or markdowns you applied.
Add up the total cost of the goods in your opening inventory and the total cost of the goods you purchased during the year
Divide the difference between total retail selling prices and total costs by the total retail selling prices. This will be the average percentage markup.
Calculate ending inventory value at retail as follows:
Take the total value of your opening inventory and your total purchases for the year at your retail selling price (from the first part of step 1.)
Add markups and subtract markdown.
Subtract sales for the year, at the retail selling price, from the total in a).
Multiply the ending inventory value at retail (from step 2) by the percentage markup (calculated in step 1).
Subtract the percentage markup (from step 3) from the ending inventory value at retail (step 2) in order to arrive at the ending inventory value at cost.