Question

(a) Determine the ending inventory under the conventional retail method for the furniture department of Mayron Department Stores from the following data. Cost Retail Inventory, Jan. 1 \( 149,000 \) 283,500 Purchases 1,400,000 2,160,000 Freight-in 70,000 Markups, net 92,000 Markdowns, net 48,000 Sales revenue 2,175,000 (b) If the results of a physical inventory indicated an inventory at retail of $295,000, what inferences would you draw?

Short answer

(a) Ending inventory at cost equals $199,531.25.

(b) Ending inventory at retail is $312,500, whereas, per the physical count, it is $295,000. This indicates that inventory at retail is worth $17,500, and inventory at a cost worth $11,173.75 is not accounted for.

Step-by-step solution

Calculation of ending inventory at retail

Ending inventory at retail is calculated as follows:

	Cost	Retail
Beginning inventory	$149000	$283500
Purchases	1,400,000	2,160,000
Freight-in	70,000	0
Total	1,619,000	2,443,500
Add: Markups, net		92000
	$1619000	2,535,500
Less: Markdowns, net		48000
		2,487,500
Less: Sales revenue		2,175000
Ending inventory, at retail		$312,500

Calculation of ratio of cost to selling price

The ratio of cost to selling price is calculated as follows:

$\begin{array}{rcl}RatioofCosttoSellingPrice& =& \frac{InventoryatCost}{InventoryatRetail}\\ & =& \frac{\$1,619,000}{\$2,535,500}\\ & =& 63.85\%\end{array}$

Calculation of ending inventory at cost

The ending inventory at cost is calculated as follows:

$\begin{array}{rcl}Endinginventoryat\cos t& =& InventoryatRetail\times RatioofCosttoSellingPrice\\ & =& \$312,500\times 63.85\%\\ & =& \$199,531.25\end{array}$

Calculation of Not accounted inventory at retail

Not accounted inventory at retail is calculated as follows:

$\begin{array}{rcl}NotAccountedInventoryatRetail& =& EndingInventoryatRetail-PhysicalEndingInventoryatretail\\ & =& \$312,500-\$295,000\\ & =& \$17,500\end{array}$

Calculation of Not accounted inventory at cost

Not accounted inventory at cost is calculated as follows:

$\begin{array}{rcl}NotaccountedInventoryat\cos t& =& NotaccountedinventoryatRetail\times RatioofCostofSellingPrice\\ & =& \$17,500\times 63.85\%\\ & =& \$11,173.75\end{array}$