Question

What conditions must exist for the retail inventory method to provide valid results?

Short answer

The conditions required are:

• Maintain the record of total cost and retail value of inventories purchased.
• Maintain the record cost and retail value of the cost of goods available for sale.
• Maintain the record for current year’s sales

Step-by-step solution

Retail Inventory Method

The retail inventory method is an inventory valuation method in which inventory value at retail price is converted into cost price.

Conditions

The first condition is to prepare the proper record of inventories purchase. Both retail value and the cost price are required.

The second condition is related to the cost of goods available for sale, in which both retail and cost prices are required to be maintained.

Finally, the current year’s sales records are required to provide valid results in the inventory retail method.