Chapter 8, Problem 8.13BYP

1.

To determine

Lower-of-cost-or-market value:

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

Average Cost Method:

In this method, the cost of inventory is priced at the average rate of the goods available for sale. Following is the mathematical representation:

$\text{Average Cost}=\frac{\text{Total Cost of Goods Available For Sale}}{\text{Total Number of Units Available For Sale}}$

Gross profit ratio:

Gross profit ratio is the financial ratio that shows the relationship between the gross profit and net sales. Gross profit is the difference between the total revenues and cost of goods sold. It is calculated by using the following formula:

$\text{Gross profit ratio}=\frac{\text{Gross profit}}{\text{Net sales}}\times 100$

Inventory turnover ratio:

This is a financial metric that is used to quantify the number of times the inventory is used or sold during an accounting period.

The inventory method which Company P uses to value its inventories.

2.

To determine

The additional expenditures which the company includes in the initial cost of merchandise, in addition to the purchase price.

3.

To determine

To Calculate: The gross profit ratio and inventory turnover ratio for the fiscal year ended February 2, 2014.

To determine

To Compare: Company P’s ratios with the industry averages of 41% and 7.7 times.