Question

Fuque Inc. uses the retail inventory method to estimate ending inventory for its monthly financial statements. The following data pertain to a single department for the month of October 2018. Inventory, October 1, 2018 At cost \( 52,000 At retail 78,000 Purchases (exclusive of freight and returns) At cost 272,000 At retail 423,000 Freight-in 16,600 Purchase returns At cost 5,600 At retail 8,000 Markups 9,000 Markup cancellations 2,000 Markdowns (net) 3,600 Normal spoilage and breakage 10,000 Sales revenue 390,000 Instructions (a) Using the conventional retail method, prepare a schedule computing estimated lower-of-cost-or-market inventory for October 31, 2018. (b) A department store using the conventional retail inventory method estimates the cost of its ending inventory as \)60,000. An accurate physical count reveals only $47,000 of inventory at lower-of-cost-or-market. List the factors that may have caused the difference between the computed inventory and the physical count.

Short answer

1. Ending inventory at cost equals $64,588.
2. The difference may be due to incorrect estimation of markup and markdown, theft and spoilage of inventory, the difference in cost-to retail ratio, higher abnormal shortage, etc.

Step-by-step solution

Calculation of ending inventory per Lower-of-Cost-or-Market

Ending inventory at retail is calculated as follows:

	Cost		Retail
Beginning inventory	$52,000		$78,000
Purchases	272,000		423,000
Purchase returns	(5,600)		(8,000)
Freight in	16,600
Total	335,000		493,000
Add: Net markups
Markups		$9,000
Markup cancellations	_______	2,000	7,000
Totals	333,000		500,000
Deduct: Net Markdowns			3,600
Sales price of goods available			496,400
Deduct: Sales (net)			390,000
Deduct: Normal spoilage and breakage			10,000
Ending inventory at retail			$96,400
Ending inventory at cost (96,400*67%)			$64,588
Ending inventory as per Lower-of-cost-or-market			$64,588

Calculation of cost-to-retail ratio

The cost-to-retail ratio is calculated as follows:

$$\begin{gathered} \mathbf{Cost}\mathbf{-}\mathbf{to}\mathbf{-}\mathbf{Retail}\mathbf{}\mathbf{Ratio}\mathbf{=}\frac{\mathbf{InventoryatCost}}{\mathbf{InventoryatRetail}} \\ \mathbf{=}\frac{\mathbf{\$}\mathbf{335}\mathbf{,}\mathbf{000}}{\mathbf{\$}\mathbf{500}\mathbf{,}\mathbf{000}} \\ \mathbf{=}\mathbf{67}\mathbf{\%} \end{gathered}$$

Factors of difference between computed inventory and physical count

• The factors are as follows:
• Wrong estimations of markups and markdowns
• Theft and spoilage of inventory
• Abnormal shortages
• The difference in the cost-to-retail ratio related to the inventories
• Incorrect estimation of net sales revenue