Question E9-22 - Intermediate Accounting (Kieso)

Question

The records of Ellen’s Boutique report the following data for the month of April. Sales revenue \(99,000 Purchases (at cost) \)48,000 Sales returns 2,000 Purchases (at sales price) 88,000 Markups 10,000 Purchase returns (at cost) 2,000 Markup cancellations 1,500 Purchase returns (at sales price) 3,000 Markdowns 9,300 Beginning inventory (at cost) 30,000 Markdown cancellations 2,800 Beginning inventory (at sales price) 46,500 Freight on purchases 2,400 Instructions Compute the ending inventory by the conventional retail inventory method

Step-by-Step Solution

Answer

The ending inventory by conventional retail inventory method equals $20,440.

Calculation of ending inventory at retail

Calculation of ending inventory at retail is calculated as follows: 

	Cost		Retail
Beginning inventory	$30,000		$46,500
Purchases	48,000		88,000
Purchase returns	-2,000		-3,000
Freight on purchases	2,400		_________
Totals	78,400		131,500
Add: Net markups
Markups		10,000
Markup cancellations	_______	1,500	8,500
Totals	78,400		140,000
Deduct: Net markdowns
Markdowns		9,300
Markdowns cancellations		2,800	6,500
Sales price of goods available			133,500
Deduct: Net Sales
Sales revenue		99,000
Sales returns		2,000	97,000
Ending inventory at retail			$36,500

 

Calculation of the cost-to-retail ratio

The cost to retail ratio is calculated as follows: 

$$\begin{gathered} \mathrm{Cost}‐\mathrm{to}‐\mathrm{Retail} \mathrm{Ratio}=\frac{\mathrm{Inventory} \mathrm{at} \mathrm{Cost}}{\mathrm{Inventory} \mathrm{at} \mathrm{Retail}} \\ =\frac{\$78,400}{\$140,000} \\ =56\% \end{gathered}$$

 

Calculation of inventory value at cost

Inventory at cost is calculated as follows: 

$$\begin{gathered} \mathrm{Ending} \mathrm{Inventory} \mathrm{at} \mathrm{Cost}=\mathrm{Inventory} \mathrm{at} \mathrm{Retail}\times \mathrm{Cost}‐\mathrm{to}‐\mathrm{Retail} \mathrm{Ratio} \\ =\$36,500\times 56\% \\ =\$20,440 \end{gathered}$$

 

Thus, ending inventory at cost is $20,440.