Question

I. (Retail Inventory Method) Presented below is information related to EDK Inc.

		Cost		Retail
Inventory, May 1		$       64,000		$          98,000
Purchases in May		71,000		105,600
Freight-in		3,000
Purchase returns		2,500		3,000
Transfers out to a nearby branch		7,600		9,000
Net markups				6,000
Net markdowns				3,500
Inventory losses due to normal breakage				850
Sales at retail				110,000
Sales returns				3,600

Instructions:

1. Compute the inventory for this department as of May 31, at retail prices.
2. Compute the ending inventory using lower-of-average-cost-or-market.
3. Briefly describe the accounting features of the retail inventory method.
4. Describe the conditions that may distort the results under the retail inventory method. (e) Discuss the advantages of using the retail method with those of using cost methods of inventory pricing.

Answer 1

c)

Accounting features of Retail Method:

i) Retail Method is used t provide an estimate of stores merchandise value.

ii) Retails Method is used as supplementary for counting the inventory physically to avoid material discrepancy between the actual and physical value.

d)

Conditions that may distort the results under retail inventory method:

i) when markup fluctuates

ii) when huge acquisition has been happened with different markup

iii) when physical damage occurred when inventory or shoplifting is not considered in retail method

e)

Advantages of using the retail method using cost methods of inventory pricing:

i) due to this, physical count of inventory is not required.

ii) Time saves and cost effective

iii) it is used for budgeting