compute the ending inventory using the retail method. Explain the steps that you would use in calculating this.
compute the ending inventory using the retail method. Explain the steps that you would use in calculating this.
Cornerstones of Financial Accounting
4th Edition
ISBN:9781337690881
Author:Jay Rich, Jeff Jones
Publisher:Jay Rich, Jeff Jones
Chapter6: Cost Of Goods Sold And Inventory
Section: Chapter Questions
Problem 44E: Perpetual and Periodic Inventory Systems Below is a list of inventory systems options. a. Perpetual...
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You have been asked by your boss to compute the ending inventory using the retail method. Explain the steps that you would use in calculating this.
![retail method
3
Accounting Inventory System
Retail method
• Values merchandise at current retail prices, which
is then converted to cost based on a formula
• Basic steps
• Calculation of the cost complement
• Cost complement = Total cost valuation/ Total retail
valuation
• Calculation of reductions from retail value
• Conversion of the adjusted retail book inventory to
cost
• Closing inventory = Adjusted retail X Cost complement
book inventory
Accounting Inventory System
• Advantages of the retail method over the cost
method of inventory valuation:
• Accounting statements can be drawn up at any
time
• Inventories need not be taken for preparation
Physical inventories using retail prices:
• Are less subject to error
• Can be completed in a shorter amount of time
• Provides an automatic, conservative valuation of
ending inventory as well as inventory levels
LO 3
Accounting Inventory System
●
Disadvantages of the retail method
• Method of averages
• Closing inventory is valued at the average relationship
between eat and retail
LO 3](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F60fdd5b9-8b98-46af-8fac-7f118ccd0829%2F740b6c87-03ab-400f-a214-755e6c862ba8%2Fc0wpepl_processed.jpeg&w=3840&q=75)
Transcribed Image Text:retail method
3
Accounting Inventory System
Retail method
• Values merchandise at current retail prices, which
is then converted to cost based on a formula
• Basic steps
• Calculation of the cost complement
• Cost complement = Total cost valuation/ Total retail
valuation
• Calculation of reductions from retail value
• Conversion of the adjusted retail book inventory to
cost
• Closing inventory = Adjusted retail X Cost complement
book inventory
Accounting Inventory System
• Advantages of the retail method over the cost
method of inventory valuation:
• Accounting statements can be drawn up at any
time
• Inventories need not be taken for preparation
Physical inventories using retail prices:
• Are less subject to error
• Can be completed in a shorter amount of time
• Provides an automatic, conservative valuation of
ending inventory as well as inventory levels
LO 3
Accounting Inventory System
●
Disadvantages of the retail method
• Method of averages
• Closing inventory is valued at the average relationship
between eat and retail
LO 3
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