Retail Inventory Method

It is not uncommon in an examination problem to find calculation of the value of the stock at the end of the accounting period for the purpose of finalizing the accounts. In such cases the value of stock given pertains to a date other than the balance sheet date. Suppose a firm closes its books of accounts on December 31, the value of the stock given may relate to, say, December 27, or January 6 next, In such a case the adjustments are required to be made for purchases, sales, returns – inwards and outwards, for the purpose of ascertaining the value of stocks as on December 31 (in this case). The following is the pattern of adjustments when the value of stock given is related to a date prior to the closing date:

(i)    Add: cost of goods purchases between the two dates;

(ii)    Deduct: cost of returns outwards (i.e., purchases returns) during the intervening period;

(iii)    Subtract: cost of sales between the two dates;

(iv)    Add: cost of returns inwards between two dates.

Notes

(1)    Cost of sale figures must be adjusted in the light of sales made on approval basis, hire purchase system etc.

(2)    When sales have been made at a loss or at a profit different from the normal rate of profit, the cost of sales must be calculated separately and not mixed up with the normal or routine sales.

WHEN THE GIVEN STOCK FIGURE RELATES TO THE DATE OF NEXT ACCOUNTING PERIOD, THE PROCEDURE OUTLINED ABOVE IS RESERVED.

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