Final answer:
The retail method and the cost method are two common ways for retailers to value their inventory. The retail method calculates the cost of the ending inventory based on the selling price and the cost percentage, while the cost method calculates the cost of the ending inventory based on the actual cost of the goods. Each method has its own advantages and disadvantages.
Step-by-step explanation:
Retailers value their inventory using different methods, but two common methods are the retail method and the cost method. The retail method values the inventory based on the selling price and the cost percentage of the goods. It calculates the cost of the ending inventory by multiplying the retail value of the inventory by the cost percentage. This method offers advantages such as simplicity and the ability to quickly determine the cost of goods sold. However, it has disadvantages including the potential for overvaluing the inventory and the need for accurate sales and pricing data.
The cost method, on the other hand, values the inventory based on the actual cost of the goods. It calculates the cost of the ending inventory by adding the cost of goods purchased to the beginning inventory and subtracting the cost of goods sold. This method offers advantages such as accuracy and the ability to track the exact cost of each item. However, it has disadvantages including the complexity of tracking individual item costs and the potential for fluctuations in the cost of goods.