Retail Method P 9. Fuentes Company operates a large discount store and uses the

ID: 2650650 • Letter: R

Question

Retail Method

P 9. Fuentes Company operates a large discount store and uses the retail method to estimate the cost of ending inventory. Management suspects that in recent weeks there have been unusually heavy losses from shoplifting or employee pilfer- age. To estimate the amount of the loss, the company has taken a physical inven- tory and will compare the results with the estimated cost of inventory. Data from the accounting records of Fuentes Company are as follows:

At Cost At Retail

October 1 beginning inventory $51,488 $ 74,300

Purchases 71,733 108,500

Purchases returns and allowances (2,043) (3,200)

Freight-in 950

Sales 109,183

Sales returns and allowances (933)

October 31 physical inventory at retail 62,450

Required

1. Using the retail method, prepare a schedule to estimate the dollar amount of the store’s month-end inventory at cost.

2. Use the store’s cost to retail ratio to reduce the retail value of the physical inventory to cost.

3. Calculate the estimated amount of inventory shortage at cost and at retail.

4. Many retail chains use the retail method because it is efficient. Why do you

think using this method is an efficient way for these companies to operate?

Explanation / Answer

Solution-1,2 and 3

Cost

Retail

Solution-1

Beginning inventory

$ 51,488

$ 74,300

Net purchases for the period:

Purchases

71,733

108,500

Purchases returns and allowances

(2,043)

(3,200)

Freight-in

950

Goods available for sale

$122,128

$179,600

Ratio of cost to retail price: $122,128 / $179,600=68%

Net sales during the period:

Sales

$109,183

Sales returns and allowances

(933)

Net sales

$108,250

Estimated ending inventory at retail

$71,350

Ratio of cost to retail

68%

Estimated cost of ending inventory = $71,350*68%

$ 48,518

Solution-2

October 31 physical inventory = $62,450*68%

42,466

62,450

Solution-3

Estimated inventory shortage at cost and retail

$6,052

$8,900

Solution-4

The retail method is an efficient way for companies to operate because sales employees in many locations can take the inventory in their store by recording the retail price of all the goods at their location. In this scenario knowing about cost not required because cost can be estimate by the office or home office.