Concept explainers
1.
Calculate the cost of ending inventory under FIFO cost flow using retail inventory method.
1.
Explanation of Solution
Retail inventory method: It takes into account all the retail amounts that is, the current selling prices. Under this method, the goods available for sale, at retail is deducted from the sales, at retail to determine the ending inventory, at retail.
Conventional Retail Method: Conventional retail method refers to the estimation of the lower of average cost or market by eliminating the markdowns from the calculation of the cost-to-retail percentage.
In this case, the cost-to-retail percentage will be determined by dividing the goods available for sale at cost by the goods available for at retail (excluding markdowns). Thus, the conventional retail method will always result in lower estimation of ending inventory when the markdowns exist.
FIFO: Under this inventory method, the units that are purchased first are sold first. Thus, it starts from the selling of the beginning inventory, followed by the units purchased in a chronological order of their purchases took place during a particular period.
Calculate the cost of ending inventory by the retail method using FIFO cost flow:
Ending Inventory - FIFO | ||
Details | Cost ($) | Retail ($) |
Purchases | 140,000 | 190,000 |
Less: Purchases discount taken | (3,000) | 0 |
Purchases returns | (5,000) | (8,000) |
Freight -in | 20,000 | 0 |
Net additional markups | 0 | 40,000 |
Net markdowns | 0 | (12,000) |
Goods available for sale after markdowns | 152,000 | 210,000 |
Add: Beginning inventory | 29,000 | 45,000 |
Goods available for sale | 181,000 | 255,000 |
Less: Net sales | (190,000) | |
Employee discounts | (3,000) | |
Ending inventory at retail | $62,000 | |
Ending inventory at cost | $44,888 |
Table (1)
Working note 1:
Calculate the amount of net additional markups:
Working note 2:
Calculate the amount of net additional markdowns:
Working note 3:
Calculate ending inventory at cost:
Step 1: Calculate cost-to-retail ratio.
Step 2: Calculate ending inventory at cost.
Therefore, the cost of ending inventory by the retail method using FIFO cost flow is $44,888.
2.
Calculate the cost of ending inventory under average cost flow using retail inventory method.
2.
Explanation of Solution
Average cost method: Under this method, the cost of the goods available for sale is divided by the number of units available for sale during a particular period.
Calculate the cost of ending inventory by the retail method using average cost flow:
Ending Inventory - Average Cost | ||
Details | Cost ($) | Retail ($) |
Beginning inventory | 29,000 | 45,000 |
Purchases | 140,000 | 190,000 |
Less: Purchases discount taken | (3,000) | 0 |
Purchases returns | (5,000) | (8,000) |
Freight -in | 20,000 | 0 |
Net additional markups | 0 | 40,000 |
Net markdowns | 0 | (12,000) |
Goods available for sale after markdowns | 181,000 | 255,000 |
Less: Net sales | (190,000) | |
Employee discounts | (3,000) | |
Estimated ending inventory at retail | $62,000 | |
Estimated ending inventory at cost | $44,020 |
Table (2)
Working note 1:
Calculate ending inventory at cost:
Step 1: Calculate cost-to-retail ratio.
Step 2: Calculate ending inventory at cost.
Therefore, the cost of ending inventory by the retail method using average cost flow is $44,020.
3.
Calculate the cost of ending inventory under LIFO cost flow using retail inventory method.
3.
Explanation of Solution
LIFO: Under this inventory method, the units that are purchased last are sold first. Thus, it starts from the selling of the units recently purchased and ending with the beginning inventory.
Calculate the cost of ending inventory by the retail method using LIFO cost flow:
Ending Inventory - LIFO | ||
Details | Cost ($) | Retail ($) |
Beginning inventory | 29,000 | 45,000 |
Purchases | 140,000 | 190,000 |
Less: Purchases discount taken | (3,000) | 0 |
Purchases returns | (5,000) | (8,000) |
Freight -in | 20,000 | 0 |
Net additional markups | 0 | 40,000 |
Net markdowns | 0 | (12,000) |
Goods available for sale after markdowns | 152,000 | 210,000 |
Goods available for sale | 181,000 | 255,000 |
Less: Net sales | (190,000) | |
Employee discounts | (3,000) | |
Estimated ending inventory at retail | $62,000 | |
Estimated ending inventory at LIFO cost: | ||
Beginning layer | 29,000 | |
New layer | 12,308 | |
Total cost | $41,308 |
Table (3)
Working note 1:
Calculate ending inventory at cost for beginning layer:
Step 1: Calculate cost-to-retail ratio (Beginning layer).
Step 2: Calculate ending inventory at cost (Beginning layer).
Working note 2:
Calculate ending inventory at cost for new layer:
Step 1: Calculate cost-to-retail ratio (new layer).
Step 2: Calculate ending inventory at cost (new layer).
Therefore, the cost of ending inventory by the retail method using LIFO cost flow is $41,308.
4.
Calculate the cost of ending inventory under lower of cost or market rule cost flow using retail inventory method.
4.
Explanation of Solution
Lower-of-cost-or-market: The lower-of-cost-or-market (LCM) is a method which requires the reporting of the ending merchandise inventory in the financial statement of a company, either at current market value or at historical cost price of the inventory, whichever is less.
Calculate the cost of ending inventory by the retail method using lower of cost or market rule:
Ending Inventory - LCM | ||
Details | Cost ($) | Retail ($) |
Beginning inventory | 29,000 | 45,000 |
Purchases | 140,000 | 190,000 |
Less: Purchases discount taken | (3,000) | 0 |
Purchases returns | (5,000) | (8,000) |
Freight -in | 20,000 | 0 |
Net additional markups | 0 | 40,000 |
Goods available for sale before markdowns | 181,000 | 267,000 |
Less: Net markdowns | (12,000) | |
Net sales | (190,000) | |
Employee discounts | (3,000) | |
Estimated ending inventory at retail | $62,000 | |
Estimated ending inventory at cost (LCM) | $42,036 |
Table (4)
Working note 1:
Calculate ending inventory at cost:
Step 1: Calculate cost-to-retail ratio.
Step 2: Calculate ending inventory at cost.
Therefore, the cost of ending inventory by the retail method using LCM cost flow is $42,036.
Want to see more full solutions like this?
Chapter 8 Solutions
Intermediate Accounting: Reporting and Analysis
- Calculate a) cost of goods sold, b) ending inventory, and c) gross margin for B76 Company, considering the following transactions under three different cost allocation methods and using perpetual inventory updating. Provide calculations for weighted average (AVG).arrow_forwardCalculate a) cost of goods sold, b) ending inventory, and c) gross margin for B76 Company, considering the following transactions under three different cost allocation methods and using perpetual inventory updating. Provide calculations for last-in, first-out (LIFO).arrow_forwardCalculate a) cost of goods sold, b) ending inventory, and c) gross margin for B76 Company, considering the following transactions under three different cost allocation methods and using perpetual inventory updating. Provide calculations for first-in, first-out (FIFO).arrow_forward
- Use the weighted-average (AVG) cost allocation method, with perpetual inventory updating, to calculate (a) sales revenue, (b) cost of goods sold, and c) gross margin for A75 Company, considering the following transactions.arrow_forwardUse the last-in, first-out method (LIFO) cost allocation method, with perpetual inventory updating, to calculate (a) sales revenue, (b) cost of goods sold, and c) gross margin for B75 Company, considering the following transactions.arrow_forwardUse the last-in, first-out (LIFO) cost allocation method, with perpetual inventory updating, to calculate (a) sales revenue, (b) cost of goods sold, and c) gross margin for A75 Company, considering the following transactions.arrow_forward
- Retail Inventory Method Turner Corporation uses the retail inventory method. The following information relates to 2019: Required: Compute the cost of the ending inventory under each of the following cost flow assumptions (round the cost-to-retail ratio to 3 decimal places): 1. FIFO 2. average cost 3. LIFO 4. lower of cost or market (based on average cost)arrow_forwardEffects of Inventory Costing Methods Jefferson Enterprises has the following income statement data available for 2019: Jefferson uses a perpetual inventory accounting system and the average cost method. Jefferson is considering adopting the FIFO or LIFO method for costing inventory. Jeffersons accountant prepared the following data: Required: 1. Compute income before taxes, income taxes expense, and net income for each of the three inventory costing methods. (Round to the nearest dollar.) 2. CONCEPTUAL CONNECTION Why are the cost of goods sold and ending inventory amounts different for each of the three methods? What do these amounts tell us about the purchase price of inventory during the year? 3. CONCEPTUAL CONNECTION Which method produces the most realistic amount for net income? For inventory? Explain your answer.arrow_forwardInventory Valuation Specific identification method Weighted average cost method FIFO method LIFO method LIFO liquidation LIFO conformity rule LIFO reserve Replacement cost Inventory profit Lower-of-cost-or-market (LCM) rule Inventory turnover ratio Number of days sales in inventory Moving average (Appendix) The name given to an average cost method when a weighted average cost assumption is used with a perpetual inventory system. An inventory costing method that assigns the same unit cost to all units available for sale during the period. A conservative inventory valuation approach that is an attempt to anticipate declines in the value of inventory before its actual sale. An inventory costing method that assigns the most recent costs to ending inventory. The current cost of a unit of inventory. An inventory costing method that assigns the most recent costs to cost of goods sold. A measure of how long it takes to sell inventory. The IRS requirement that when LIFO is used on a tax return, it must also be used in reporting income to stockholders. An inventory costing method that relies on matching unit costs with the actual units sold. The portion of the gross profit that results from holding inventory during a period of rising prices. The result of selling more units than are purchased during the period, which can have negative tax consequences if a company is using LIFO. The excess of the value of a companys inventory stated at FIFO over the value stated at LIFO. A measure of the number of times inventory is sold during the period.arrow_forward
- Compare the calculations for gross margin for B76 Company, based on the results of the perpetual inventory calculations using FIFO, LIFO, and AVG.arrow_forwardInventory Costing: Average Cost Refer to the information for Filimonov Inc. and assume that the company uses a perpetual inventory system. Required: Calculate the cost of goods sold and the cost of ending inventory using the average cost method. ( Note: Use four decimal places for per-unit calculations and round all other numbers to the nearest dollar.)arrow_forwardInventory Write-Down Stiles Corporation uses the FIFO cost flow assumption and is in the process of applying the LCNRV rule for each of two products in its ending inventory. A profit margin of 30% on the selling price is considered normal for each product. Specific data for each product are as follows:arrow_forward
- Intermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage LearningCornerstones of Financial AccountingAccountingISBN:9781337690881Author:Jay Rich, Jeff JonesPublisher:Cengage LearningPrinciples of Accounting Volume 1AccountingISBN:9781947172685Author:OpenStaxPublisher:OpenStax College
- Corporate Financial AccountingAccountingISBN:9781337398169Author:Carl Warren, Jeff JonesPublisher:Cengage LearningFinancial Accounting: The Impact on Decision Make...AccountingISBN:9781305654174Author:Gary A. Porter, Curtis L. NortonPublisher:Cengage Learning