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Chapter 9: Question 15Q (page 474)

What conditions must exist for the retail inventory method to provide valid results?

Short Answer

Expert verified

The conditions required are:

  • Maintain the record of total cost and retail value of inventories purchased.
  • Maintain the record cost and retail value of the cost of goods available for sale.
  • Maintain the record for current year鈥檚 sales

Step by step solution

01

Retail Inventory Method

The retail inventory method is an inventory valuation method in which inventory value at retail price is converted into cost price.

02

Conditions

The first condition is to prepare the proper record of inventories purchase. Both retail value and the cost price are required.

The second condition is related to the cost of goods available for sale, in which both retail and cost prices are required to be maintained.

Finally, the current year鈥檚 sales records are required to provide valid results in the inventory retail method.

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Most popular questions from this chapter

A fire destroys all of the merchandise of Assante Company on February 10, 2017. Presented below is information compiled up to the date of the fire. Inventory, January 1, 2017 $ 400,000 Sales revenue to February 10, 2017 1,950,000 Purchases to February 10, 2017 1,140,000 Freight-in to February 10, 2017 60,000 Rate of gross profit on selling price 40% What is the approximate inventory on February 10, 2017?

The financial statements of ConAgra Foods, Inc.鈥檚 2014 annual report disclose the following information. (in millions) 2014 2013 2012 Year-end inventories \(2,201 \)2,077 \(2,341 Fiscal Year 2014 2013 Net sales \)17,703 $15,427 Cost of goods sold 13,980 11,864 Net income 315 786Instructions Compute ConAgra鈥檚 (a) inventory turnover and (b) the average days to sell inventory for 2014 and 2013.

All of the following are key differences between GAAP and IFRS with respect to accounting for inventories except the: (a) definition of the lower-of-cost-or-market test for inventory valuation differs between GAAP and IFRS. (b) average-cost method is prohibited under IFRS. (c) inventory basis determination for write-downs differs between GAAP and IFRS. (d) guidelines are more principles-based under IFRS than they are under GAAP.

Starfish Company (a company using GAAP and the LIFO inventory method) is considering changing to IFRS and the FIFO inventory method. How would a comparison of these methods affect Starfish鈥檚 financials? (a) During a period of inflation, working capital would decrease when IFRS and the FIFO inventory method are used as compared to GAAP and LIFO. (b) During a period of inflation, the taxes will decrease when IFRS and the FIFO inventory method are used as compared to GAAP and LIFO. During a period of inflation, net income would be greater if IFRS and the FIFO inventory method are used as compared to GAAP and LIFO. (d) During a period of inflation, the current ratio would decrease when IFRS and the FIFO inventory methodare used as compared to GAAP and LIFO.

Question:Where there is evidence that the utility of inventory goods, as part of their disposal in the ordinary course of business, will be less than cost, what is the proper accounting treatment?
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