Question

In: Accounting

Presented below is information related to Flounder Company. Cost Retail Beginning inventory $ 62,430 $90,900 Purchases...

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 $

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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. %

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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.

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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 $

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

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

Solutions

Expert Solution

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


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