Your records at the end of the tax year show the following:
Your opening inventory has a cost of $35,000 and a retail value of $40,000.
You had purchases during the year at a cost of $53,000. The retail value of those purchases was $59,000.
Your sales for the year, at retail value, were $75,000.
You had markups of $1,500 and markdowns of $500.
Using the retail method, you would calculate your ending inventory value as follows:
The total cost of opening inventory and purchases is $88,000 ($35,000 plus $53,000).
The total retail value is $100,000 ($40,000 in opening inventory plus $59,000 retail value of purchases during the year plus net markups of $1,000).
The markup percentage is 12% ($12,000 divided by $100,000).
Ending inventory at retail value is $25,000 ($100,000 minus sales of $75,000).
The markup percentage in ending inventory is $3,000 (12% x $25,000).
Ending inventory at cost is therefore $22,000.
If you are using the retail method of valuation with the LIFO method of identification, you must adjust the inventory value at the end of the year to reflect price changes since the end of last year (this year’s opening inventory balance). Generally, you will have to develop your own retail price, based on an analysis of your own data, in order to make this adjustment.
Resellers who use the retail method for calculating their inventory and cost of goods sold amounts, can use this method for tax purposes if they state on their tax return that they are using this method. Accurate records must be kept, and this method must be used consistently every year, unless the IRS allows a different method to be used.
Different classes of goods may have different markup percentages, and records should be kept of each type or class of goods. The records should support the calculation of the markup percentage, and should therefore include the dates and amounts of sales invoices, any markups or markdowns, and the cost of the respective goods. Accumulated records should also be kept of inventory amounts, purchases, and sales of each type or class of goods.