Question

Retail Inventory Method

Harmes Company is a clothing store that uses the retail inventory method. The following information relates to its operations during 2016:

	Cost	Retail
Inventory, January 1	$28,800	$41,500
Purchases	66,300	104,100
Markups (net)	—	1,700
Markdowns (net)	—	700
Sales	—	82,300

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.

HARMES COMPANY
Calculation of ending inventory by retail inventory method
FIFO 2016
	Cost	Retail
	$	$
	$	$
	$	$
		$
	$

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.

HARMES COMPANY
Calculation of ending inventory by retail inventory method
Average Cost 2016
	Cost	Retail
	$	$
	$	$
		$
	$

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.

HARMES COMPANY
Calculation of ending inventory by retail inventory method
LIFO 2016
	Cost	Retail
	$	$
		$
	$	$
		$
Ending inventory at LIFO cost
Beginning layer (as stated in data)	$28,800
New layer
Total	$

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.

HARMES COMPANY
Calculation of ending inventory by retail inventory method
Lower of Cost or Market (based on average cost) 2016
	Cost	Retail
	$	$
	$	$
		$
	$

Answer 1

Solution:

1. FIFO

	Cost	Retail
Purchases	66,300	104,100
Markups(net)		1,700
Markdowns(net)		700
	66,300	105,100 (104100+1700-700)
Beginniing inventory	28,800	41,500
Goods available for sale	95,100 (66300+28800)	146,600 (105100+41500)
Less: Sales		82,300
Ending inventory at retail		64,300 (146600-82300)

Cost to retail calculation (for purchases) = 66300/105100= 0.6308 = 0.631(Rounded off to three decimals)

Ending inventory at cost = Cost to retail ratio x Ending inventory at retail = 64300 x 0.631 = 40,573.3

2. Average cost

	Cost	Retail
Beginning Inventory	28,800	41,500
Purchases	66,300	104,100
Markups (net)		1700
Markdowns (Net)		700
Goods avilable for sale	95,100 (28800+66300)	146,600 (41500+104100+1700-700)
Less: Sales		82,300
Ending inventory at retail		64,300 (146600-82300)

Cost to retail ratio calculation (for goods available for sale) = 95100/146600 =0.6487 = 0.649

Ending inventory at cost = Cost to retail ratio x Ending inventory at retail = 64300 x 0.649 = 41730.7

3. LIFO

	Cost	Retail
Beginning inventory	28,800	41,500
Purchases	66,300	104,100
Markup (net)		1,700
Markdowns (net)		700
	66300	105,100 (104100+1700-700)
Goods available for sale	95,100 (28800+66300)	146,600 (41500+105100))
Less: Sales		82,300
Ending inventory at retail		64,300 (146600-82300)

Cost to retail ratio calculation(for beginning Inventory) = 28800/41500 = 0.6939 = 0.694

Cost to retail ratio calculation (for purchases) = 66300/101500 = 0.653

Ending inventory at cost = Cost to retail ratio x inventory at retail

= (0.694 x 41500) + (0.653 x22800*) = 28801+ 14888.4 = 43,689.4

*22800 = 64300 - 41500 = 22800

4. Lower of cost or market (based on average cost)

	Cost	Retail
Beginning inventory	28800	41500
Purchases	66300	104100
Markups (net)		1700
	95100 (288000+66300)	147,300 (41500+104100+1700)
Markdowns (net)		700
Goods available for sale		146,600 (147300-700)
Less: sales		82,300
Ending inventory at retail		64,300 (146600-82300)

Cost to retail retio calcualtion = 95100/147300 = 0.646

Ending inventory at cost = Cost to retail ratio x Ending inventory at retail = 64300 x 0646 = 41,537.8