Question

Presented below is information related to Flounder Company. Cost Retail Beginning inventory $ 62,430 $90,900 Purchases (net) 113,840 183,000 Net markups 9,421 Net markdowns 26,181 Sales revenue 182,600

Compute the ending inventory at retail. Ending inventory $ Link to Text

Compute a cost-to-retail percentage under the following conditions. (Round ratios to 2 decimal places, e.g. 78.74%) Cost-to-retail percentage (1) Excluding both markups and markdowns. % (2) Excluding markups but including markdowns. % (3) Excluding markdowns but including markups. % (4) Including both markdowns and markups. % Link to Text

Which of the methods in (b) above does the following? (1) Provides the most conservative estimate of ending inventory.

(2)		Provides an approximation of lower-of-cost-or-market.
(3)		Is used in the conventional retail method.

Link to Text

Compute ending inventory at lower-of-cost-or-market. (Round ratio to 2 decimal places, e.g. 78.74% and final answer to 0 decimal places, e.g. 6,225.) Ending inventory $ Link to Text

Compute cost of goods sold based on (d). (Round answer to 0 decimal places, e.g. 6,225.) Cost of goods sold $ Link to Text

Compute gross margin based on (d). (Round answer to 0 decimal places, e.g. 6,225.) Gross margin $

Answer 1

a. Compute the ending inventory at retail

Answer:

Ending inventory

74,540

Calculation:

To calculate the ending inventory, we need to first total the retail and cost beginning inventory and purchases.

Then add the net mark ups to the retail. Then we get the Cost to retail ratio. From that we need to deduct the net mark downs. That will be the Sale price of goods available. Then deducting the sales from the Sale price of goods available, will give the ending inventory.

The calculation is done below:

	Cost	Retail
Beginning inventory	62,430	90,900
Purchases (net)	113,840	183,000
	176,270	273,900
Add: net markups		9,421
Cost to retail ratio		283,321
Less: net markdowns		26,181
Sale price of goods available		257,140
Less: sales		182,600
Ending inventory at retail		74,540

b. Compute a cost-to-retail percentage under the following conditions.

Answer:

	Cost-to-retail percentage
(1) Excluding both markups and markdowns	64.36%
(2) Excludnig markups but including markdowns	71.16%
(3) Excluding markdowns but including markups	62.22%
(4) Including both markdowns and markups	68.55%

Calculation:

(1) Excluding both markups and markdowns = Total cost / Retail excluding markups and markdown = 176,270 / 273,900 = 64.36%

(2) Excluding markups but including markdowns = Total cost / Retail excluding markups = (176,270/(273,900 - 26,181) = 71.16%

(3) Excluding markdowns but including markups =  Total cost / Cost to retail ratio = 176,270 / 283,321 = 62.22%

(4) Including both markdowns and markups = Total cost / Retail including markdown and markup = ((176,270 /(273,900 + 9,421 - 26,181)) = 68.55%

c. Which of the methods in (b) above does the following?

Answer:

(1) Provides the most conservative estimate of ending inventory	Excluding markdowns but including markups
(2) Provides an approximation of lower-of-cost-or-market	Excluding markdowns but including markups
(3) Is used in the conventional retail method	Excluding markdowns but including markups

Explanation:

The Excluding markdown but including mark up method provides the most conservative estimate of ending inventory and an approximation of lower-of-cost-or-market. Also, it is used in the conventional retail method. Lower of cost or market is calculated based on that.

d. Compute ending inventory at lower-of-cost-or-market.

Answer:

Ending inventory

46,379

Calculation:

To calculate the ending inventory, at lower-of-cost-or-market, we need to multiply the Excluding markdowns but including markups method percentage with the ending inventory calculated.

Ending inventory = 74,540

Excluding markdowns but including markups = 62.22%

ending inventory at lower-of-cost-or-market  =74,540 *62.22% = 46,379

e. Compute cost of goods sold based on (d)

Answer:

Cost of goods sold

129,891

Calculation:

To calculate the cost of goods sold, we need to add purchases to beginning inventory and then deduct the ending inventory

Cost of goods sold = beginning inventory + purchases - ending inventory = 62,430 + 113,840 - 46,379 = 129,891

f. Compute gross margin based on (d)

Answer:

Gross Margin

52,709

Calculation:

To calculate the Gross margin, we need to deduct the cost of goods sold from sales.

Gross margin = sales revenue - cost of goods sold = 182,600 - 129,891 = 52,709