Question

Can You Describe and give a brief summary on retail inventory method and how markups are treated.

Answer 1

The retail inventory method is only an estimate. Do not rely upon it too heavily to yield results that will compare with those of a physical inventory count.
The retail inventory method only works if you have a consistent mark-up across all products sold. If not, the actual ending inventory cost may vary wildly from what you derived using this method.
The retail inventory method is sometimes used by retailers that resell merchandise to estimate their ending inventory balances. This method is based on the relationship between the cost of merchandise and its retail price. The method is not entirely accurate, and so should be periodically supplemented by a physical inventory count. Its results are not adequate for the year-end financial statements, for which a high level of inventory record accuracy is needed.

The method assumes that the historical basis for the mark-up percentage continues into the current period. If the mark-up was different (as may be caused by an after-holiday sale), then the results of the calculation will be incorrect.

The method does not work if an acquisition has been made, and the acquiree holds large amounts of inventory at a significantly different mark-up percentage from the rate used by the acquirer. In this case, however, it may be possible to separately apply the retail method to the acquiree and the acquirer.