Question

In 2017, Dakota Company had net sales (at retail) of \(260,000. The following additional information is available from its records at the end of 2017. Use the retail inventory method to estimate Dakota’s 2017 ending inventory at cost.

	At Cost	At Retail
Beginning Inventory	\)63,800	$128,400
Cost of goods purchased	115,060	196,800

Short answer

Ending Inventory at cost is equal to$35,860.

Step-by-step solution

Definition of Retail Inventory Method

The valuation method of ending inventory under which the value is determined using the cost to retail ratio is known as the retail inventory method. This ratio is calculated using the cost of the merchandise and the price of the merchandise.

Definition of Retail Inventory Method

Calculation of cost to retail ratio:

$\begin{array}{rcl}\mathrm{Cost}\mathrm{to}\mathrm{retail}\mathrm{ratio}& =& \frac{\mathrm{Beginning}\mathrm{inventory}\mathrm{at}\mathrm{cost}+\mathrm{Cost}\mathrm{of}\mathrm{goods}\mathrm{purchased}\mathrm{at}\mathrm{cost}}{\mathrm{Beginning}\mathrm{inventory}\mathrm{at}\mathrm{retail}+\mathrm{Cost}\mathrm{of}\mathrm{goods}\mathrm{purchased}\mathrm{at}\mathrm{retail}}\\ & =& \frac{\$63,800+\$115,060}{\$128,400+\$196,800}\\ & =& \frac{\$178,860}{\$325,200}\\ & =& 0.55\end{array}$

Calculation of Ending Inventory:

$\begin{array}{rcl}\mathrm{Ending}\mathrm{inventory}& =& \left(\mathrm{Beginning}\mathrm{inventory}\mathrm{at}\mathrm{retail}+\mathrm{cost}\mathrm{goods}\mathrm{purchased}\mathrm{at}\mathrm{retail}-\mathrm{Net}\mathrm{sales}\right)\times \mathrm{Cost}\mathrm{to}\mathrm{retail}\mathrm{ratio}\\ & =& \left(\$128,400+\$196,800-\$260,000\right)\times 0.55\\ & =& 65,200\times 0.55\\ & =& \$35,860\end{array}$