Chapter 8, Problem 6P

1.

To determine

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

Explanation of Solution

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
Details	Cost ($)	Retail ($)
Purchases	140,000	190,000
Less: Purchases discount taken	(3,000)	0
Purchases returns	(5,000)	(8,000)
Freight -in	20,000	0
Net additional markups	0	40,000
Net markdowns	0	(12,000)
Goods available for sale after markdowns	152,000	210,000
Add: Beginning inventory	29,000	45,000
Goods available for sale	181,000	255,000
Less: Net sales		(190,000)
Employee discounts		(3,000)
Ending inventory at retail		$62,000
Ending inventory at cost	$44,888

Table (1)

Working note 1:

Calculate the amount of net additional markups:

$\begin{array}{c}\text{Net additional markups = }\left(\begin{array}{l}\text{Additional markups at retail}-\\ \text{Markup cancellations}\end{array}\right)\\ =\left(\$50,000-\$10,000\right)\\ =\$40,000\end{array}$

Working note 2:

Calculate the amount of net additional markdowns:

$\begin{array}{c}\text{Net additional markdowns = }\left(\begin{array}{l}\text{Markdowns at retail}-\\ \text{Markdown cancellations}\end{array}\right)\\ =\left(\$15,000-\$3,000\right)\\ =\$12,000\end{array}$

Working note 3:

Calculate ending inventory at cost:

Step 1: Calculate cost-to-retail ratio.

$\begin{array}{c}\text{Cost-to-retail ratio= }\left(\frac{\begin{array}{l}\text{Goods available for sale at cost }\\ \text{(After markdowns)}\end{array}}{\begin{array}{l}\text{Goods available for sale at retail }\\ \text{(After markdowns)}\end{array}}\right)\\ =\left(\frac{\text{\$152,000}}{\$210,000}\right)\\ =.724\end{array}$

Step 2: Calculate ending inventory at cost.

$\begin{array}{c}\text{Ending inventory at cost = }\left(\begin{array}{l}\text{Ending inventory at retail}\\ \times \text{Cost-to-retail ratio}\end{array}\right)\\ \text{=}\left(\$62,000\times .724\right)\\ =\$44,888\end{array}$

Conclusion

Therefore, the cost of ending inventory by the retail method using FIFO cost flow is $44,888.

2.

To determine

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

Explanation of Solution

Average cost method: Under this method, the cost of the goods available for sale is divided by the number of units available for sale during a particular period.

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

Ending Inventory - Average Cost
Details	Cost ($)	Retail ($)
Beginning inventory	29,000	45,000
Purchases	140,000	190,000
Less: Purchases discount taken	(3,000)	0
Purchases returns	(5,000)	(8,000)
Freight -in	20,000	0
Net additional markups	0	40,000
Net markdowns	0	(12,000)
Goods available for sale after markdowns	181,000	255,000
Less: Net sales		(190,000)
Employee discounts		(3,000)
Estimated ending inventory at retail		$62,000
Estimated ending inventory at cost	$44,020

Table (2)

Working note 1:

Calculate ending inventory at cost:

Step 1: Calculate cost-to-retail ratio.

$\begin{array}{c}\text{Cost-to-retail ratio= }\left(\frac{\begin{array}{l}\text{Goods available for sale at cost }\\ \text{(After markdowns)}\end{array}}{\begin{array}{l}\text{Goods available for sale at retail }\\ \text{(After markdowns)}\end{array}}\right)\\ =\left(\frac{\text{\$181,000}}{\$255,000}\right)\\ =.710\end{array}$

Step 2: Calculate ending inventory at cost.

$\begin{array}{c}\text{Ending inventory at cost = }\left(\begin{array}{l}\text{Ending inventory at retail}\\ \times \text{Cost-to-retail ratio}\end{array}\right)\\ \text{=}\left(\$62,000\times .710\right)\\ =\$44,020\end{array}$

Conclusion

Therefore, the cost of ending inventory by the retail method using average cost flow is $44,020.

3.

To determine

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

Explanation of Solution

LIFO: Under this inventory method, the units that are purchased last are sold first. Thus, it starts from the selling of the units recently purchased and ending with the beginning inventory.

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

Ending Inventory - LIFO
Details	Cost ($)	Retail ($)
Beginning inventory	29,000	45,000
Purchases	140,000	190,000
Less: Purchases discount taken	(3,000)	0
Purchases returns	(5,000)	(8,000)
Freight -in	20,000	0
Net additional markups	0	40,000
Net markdowns	0	(12,000)
Goods available for sale after markdowns	152,000	210,000
Goods available for sale	181,000	255,000
Less: Net sales		(190,000)
Employee discounts		(3,000)
Estimated ending inventory at retail		$62,000
Estimated ending inventory at LIFO cost:
Beginning layer	29,000
New layer	12,308
Total cost	$41,308

Table (3)

Working note 1:

Calculate ending inventory at cost for beginning layer:

Step 1: Calculate cost-to-retail ratio (Beginning layer).

$\begin{array}{c}\text{Cost-to-retail ratio= }\left(\frac{\text{Beginning inventory for cost}}{\text{Beginning inventory for retail}}\right)\\ =\left(\frac{\text{\$29,000}}{\$45,000}\right)\\ =.644\end{array}$

Step 2: Calculate ending inventory at cost (Beginning layer).

$\begin{array}{c}\text{Ending inventory at cost = }\left(\begin{array}{l}\text{Beginning inventory at retail}\\ \times \text{Cost-to-retail ratio}\end{array}\right)\\ \text{=}\left(\$45,000\times .644\right)\\ =\$29,000\left(\text{Rounded}\right)\end{array}$

Working note 2:

Calculate ending inventory at cost for new layer:

Step 1: Calculate cost-to-retail ratio (new layer).

$\begin{array}{c}\text{Cost-to-retail ratio= }\left(\frac{\begin{array}{l}\text{Goods available for sale at cost }\\ \text{(After markdowns)}\end{array}}{\begin{array}{l}\text{Goods available for sale at retail }\\ \text{(After markdowns)}\end{array}}\right)\\ =\left(\frac{\text{\$152,000}}{\$\text{210,000}}\right)\\ =.724\end{array}$

Step 2: Calculate ending inventory at cost (new layer).

$\begin{array}{c}\text{Ending inventory at cost = }\left(\begin{array}{l}\text{\$17,000}\left(\begin{array}{l}\$210,000\\ -\$193,000\end{array}\right)\\ \times \text{Cost-to-retail ratio}\end{array}\right)\\ \text{=}\left(\$17,000\times .724\right)\\ =\$12,308\end{array}$

Conclusion

Therefore, the cost of ending inventory by the retail method using LIFO cost flow is $41,308.

4.

To determine

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

Explanation of Solution

Lower-of-cost-or-market: The lower-of-cost-or-market (LCM) is a method which requires the reporting of the ending merchandise inventory in the financial statement of a company, either at current market value or at historical cost price of the inventory, whichever is less.

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

Ending Inventory - LCM
Details	Cost ($)	Retail ($)
Beginning inventory	29,000	45,000
Purchases	140,000	190,000
Less: Purchases discount taken	(3,000)	0
Purchases returns	(5,000)	(8,000)
Freight -in	20,000	0
Net additional markups	0	40,000
Goods available for sale before markdowns	181,000	267,000
Less: Net markdowns		(12,000)
Net sales		(190,000)
Employee discounts		(3,000)
Estimated ending inventory at retail		$62,000
Estimated ending inventory at cost (LCM)	$42,036

Table (4)

Working note 1:

Calculate ending inventory at cost:

Step 1: Calculate cost-to-retail ratio.

$\begin{array}{c}\text{Cost-to-retail ratio= }\left(\frac{\begin{array}{l}\text{Goods available for sale at cost }\\ \text{(before markdowns)}\end{array}}{\begin{array}{l}\text{Goods available for sale at retail }\\ \text{(before markdowns)}\end{array}}\right)\\ =\left(\frac{\text{\$181,000}}{\$267,000}\right)\\ =.678\end{array}$

Step 2: Calculate ending inventory at cost.

$\begin{array}{c}\text{Ending inventory at cost = }\left(\begin{array}{l}\text{Ending inventory at retail}\\ \times \text{Cost-to-retail ratio}\end{array}\right)\\ \text{=}\left(\$62,000\times .678\right)\\ =\$42,036\end{array}$

Conclusion

Therefore, the cost of ending inventory by the retail method using LCM cost flow is $42,036.