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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Retail Inventory Method Harmes Company is a clothing store that uses the retail inventory method. The following information relates to its operations during the year:

Chapter 8, Problem 11E, Retail Inventory Method Harmes Company is a clothing store that uses the retail inventory method.

Required:

Compute the ending inventory by the retail inventory method for the following cost flow assumptions (round the cost-to-retail ratio to 3 decimal places):

  1. 1. FIFO
  2. 2. average cost
  3. 3. LIFO
  4. 4. lower of cost or market (based on average cost)

1.

To determine

Calculate the cost of ending inventory by the retail method using FIFO cost flow.

Explanation

Retail inventory method: It takes into account all the retail amounts that is, the current selling prices. Under this method, the goods available for sale, at retail is deducted from the sales, at retail to determine the ending inventory, at retail.

Conventional Retail Method: Conventional retail method refers to the estimation of the lower of average cost or market by eliminating the markdowns from the calculation of the cost-to-retail percentage.

In this case, the cost-to-retail percentage will be determined by dividing the goods available for sale at cost by the goods available for at retail (excluding markdowns). Thus, the conventional retail method will always result in lower estimation of ending inventory when the markdowns exist.

FIFO: Under this inventory method, the units that are purchased first are sold first. Thus, it starts from the selling of the beginning inventory, followed by the units purchased in a chronological order of their purchases took place during a particular period.

Calculate the cost of ending inventory by the retail method using FIFO cost flow:

Ending Inventory - FIFO
DetailsCost ($)Retail ($)
Purchases65,200100,000
Markups 1,900
Markdowns0(400)
 65,200101,500
Add: Beginning inventory28,40040,200
Goods available for sale93,600141,700
Less: Sales (80,000)
Ending inventory at retail $61,700
Ending inventory at cost$39,611 

Table (1)

Working note 1:

Calculate ending inventory at cost:

Step 1: Calculate cost-to-retail ratio...

2.

To determine

Calculate the cost of ending inventory by the retail method using average cost flow.

3.

To determine

Calculate the cost of ending inventory by the retail method using LIFO cost flow.

4.

To determine

Calculate the cost of ending inventory by the retail method using lower of cost or market rule.

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