Question

What is the determing factor in how accounts are considered into the calculation of the cost to retail ratio ( when finding the ending inventory using the conventional retail method) ?                   

Answer 1

The determining factors are the cost price of the goods available for sales and the margin added on the cost to make the goods available at retail value to be sold out the customer.

Thus, to determine the closing stock at the retail value, we deduct the balance in "Sales account for the period" from the total balance in Account "Retail value of the goods available for sale". The ratio of cost to retail for all goods the firm have is determined by dividing the Account "Total goods available for sale at cost" by the Account "Total goods available at retail". Finally, the "Closing inventory valued at retail" is converted to "Ending inventory at cost" by applying the cost to retail ratio. Numerically, it can be shown as:

	Cost	Retail
Beginning	$14000	20000
Purchases	63000	90000
Goods available for sale	77000	110000
Less: sales		85000
Closing inventory at retail		$25000
Ratio of cost to retail= 77000/110000= 70%
So, Closing inventory at cost = $25000*70% = $17500