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General Accounting Discussions: use cost ratio to reduce the retail value of physical inventory?

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    • CommentAuthormtnwb
    • CommentTimeApr 1st 2008
     
    I am a little confused regarding this problem as the examples in my book are not good at all. The problems says this company recently switched to the retail inventory method to estimate the cost of ending inventory. To test this method, the company took a physical inventory one month after it's implementation.
    The Cost, retail, and the physical inventory data are then listed in the book.
    I am supposed to prepare a schedule to: 1. estimate the dollar amount of a company's July 31st inventory using the retail method. 2. Use the cost ratio to reduce the retail value of the physical inventory to cost. 3. Calculate the estimated amount of inventory shortage at cost and at retail.
    This is the information provided: At Cost At Retail
    July 1 Beginning inventory $472,132 $622,800
    Purchases 750,000 1,008,400
    Purchases Returns & Allowances (25,200) (34,800)
    Freight In 8,350
    Sales 1,060,000
    Sales Returns & Allowances (28,000)
    July 31 physical inventory 508,200

    Basically, I know how to estimate the dollar abount of the inventory and I know how to do the cost ratio, but the things that are throwing me off are the Freight in and Returns & Allowances. Also the book doesn't have good "show me" examples. I need to SEE an example with very clear explanations and the book just doesn't give anything like this in the chapter. Pleeeese HELP if you can. I have done 6 hours of homework and this is the last problem.
    • CommentAuthorPatP3005
    • CommentTimeApr 1st 2008
     
    The Freight In would be added to the "at cost" amounts. It wouldn't be added to the Retail, because the Retail "is" what it "is". It's already been established, presumably including any costs, profit %s, etc.

    The Purchases Returns & Allowances would reduce the amounts of cost and retail respectively. I would assume that the Sales Returns & Allowances would only reduce the Retail. My thinking is that since they've only given you one number, it has to apply to what they gave in refund to the customer at retail value. Because they gave a refund, they likely still have the merchandise and can resell it, therefore, it is still in - or is being returned to - inventory. That's assuming a lot, but it does make logical sense to me.

    Six hours of homework! Arghh!! Take a break and get some sleep. It will all be clear when you come back to it. Good luck!
    Thankful People: mtnwb
    • CommentAuthormtnwb
    • CommentTimeApr 1st 2008
     
    Thank you PatP3005. I appreciate your comments. Maybe today with a clear head, I can finish this last problem.

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