Retail Inventory Method Harmes Company is a clothing store that uses the retail

Question

Retail Inventory Method

Harmes Company is a clothing store that uses the retail inventory method. The following information relates to its operations during 2013:

Required:

1. Compute the ending inventory by the retail inventory method for the following cost flow assumption: FIFO. Round the cost-to-retail ratio to three decimal places. If necessary, round dollar amounts to the nearest whole dollar.

2. Compute the ending inventory by the retail inventory method for the following cost flow assumption: Average cost. Round the cost-to-retail ratio to three decimal places. If necessary, round dollar amounts to the nearest whole dollar.

3. Compute the ending inventory by the retail inventory method for the following cost flow assumption: LIFO. Round the cost-to-retail ratio to three decimal places. If necessary, round dollar amounts to the nearest whole dollar.

4. Compute the ending inventory by the retail inventory method for the following cost flow assumption: Lower of cost or market (based on average cost). Round the cost-to-retail ratio to three decimal places. If necessary, round dollar amounts to the nearest whole dollar.

Cost Retail Inventory, January 1 $30,000 $40,900 Purchases 70,000 96,700 Markups (net) — 2,300 Markdowns (net) — 300 Sales — 78,000

Explanation / Answer

Particulars                                           Cost                                       Retail                     (Cost / Retail) Ration in %

Beginning inventory                       $30000                                  $40900                  73.349%

Purchase                                             $70000                                  $96700                  72.388%

Add Mark up to Retail                                                                    $2300

Subtract Mark down from Retail                                                               -$300

Total Goods Available for Sales $100000                                $139600                71.633%

Sales                                                                                                      $78000

Closing inventory in retail                                                             $61600

1.

Ending inventory in retail inventory method (FIFO)

Closing Inventory at cost = Closing inventory in retail* Cost to retail ratio at purchase

Closing Inventory at cost =61600*72.388% = $44591

Note: in FIFO method, Goods first entered are sent out first. Thus, goods purchases will remain in inventory due to their recent purchase. That’s why, Cost to retail ratio at purchase is used.

2.

In average cost, Cost to retail ratio at Total Goods Available for Sales will be used

Ending inventory at cost = Closing inventory in retail* Cost to retail ratio at Total Goods Available for Sales

Ending inventory at cost =61600*71.633% = $44125.93 or $44126 approx.

3.

In LIFO method, Cost to retail ratio at the beginning inventory will be used as goods purchased later will be released first.

Ending inventory at cost =61600*73.349% = $45182.98 or $45183 approx.

4.

Value of closing inventory is lowest at average cost. Thus, in this method value of inventory is $44126.

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