Question

How does the TJX companies Inc. value its inventory?

Answer 1

The TJX Companies Inc. adopted the retail method of valuation of inventories.
Retail Method:
Retail method is an inventory valuation technique used to evaluate the value of inventory at the end of the period using the 'cost to retail price' ratio. The 'cost to retail price' ratio is computed as follows:

Cost to retail price ratio = (A + B) / (C + D)
Where,

    A = Cost of the beginning inventory
    B = Cost of goods purchased during the year
    C = Retail price of the opening inventory
    D = Retail price of the goods purchased during the year

Once the 'cost to retail price' ratio is computed, the company should compute the retail price of 'goods available for sale.'
After the retail price of 'goods available for sale' is ascertained, the company should subtract the total sales during the period from the retail price of goods available for sale. The residue is the 'retail value' of closing inventory. Now to obtain the cost of closing inventory, we should multiply the same with the 'cost to retail price ratio.'

The company has adopted the 'retail method' of valuing the inventory on the 'first-in-first-out' basis. Most of the companies in the retail industry adopt the technique since they believe that it results in a conservative valuation of inventory than any other accounting method of valuation of inventory available. This is due to the permanent markdowns which are reflected in the inventory value when the price of the inventory changes. Such change impacts the 'cost to retail price' ratio and the reduction in price will be reflected in the value of closing stock. Adoption of the 'first-in-first-out' basis will ensure that the value of inventory closely reflects the existing market conditions.