7.07 - INVENTORY ESTIMATION METHODS

Question 1

7.07 - INVENTORY ESTIMATION METHODS

Hutch, Inc. uses the conventional retail inventory method to account for inventory. The following information
relates to 20X1 operations:

Average Cost / Retail: 
Beg.Inv & Purch: $600,000/ $920,000
Net markups:   $0  /   $40,000
Net markdowns:  $0 / $60,000
Sales: $0 /  $780,000

What amount should be reported as cost of sales for 20X1?

$525,000
$480,000
$487,500
$520,000

Answer 1

$525,000

EXPLANATION

Under the conventional retail method, beginning inventory at cost of $600,000 is compared to beginning inventory at
retail including the retail price of purchases and markups for a total of $960,000.

The result is a cost to retail percentage of 62.5%. Ending inventory at retail will be $960,000 reduced by sales of $780,000 and markdowns of $60,000 for a net amount of $120,000.

This will be multiplied by the cost to retail percentage to give ending inventory at the approximate lower of cost or market of $75,000.

Based on purchases of $600,000, cost of goods sold must be the difference of $525,000.