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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

Marvin Gaye Company has been having difficulty obtaining key raw materials for its manufacturing process. The company therefore signed a long-term noncancelable purchase commitment with its largest supplier of this raw material on November 30, 2017, at an agreed price of \(400,000. At December 31, 2017, the raw material had declined in price to \)365,000. Instructions What entry would you make on December 31, 2017, to recognize these facts?

Accounting, Analysis, and Principles Englehart Company sells two types of pumps. One is large and is for commercial use. The other is smaller and is used in residential swimming pools. The following inventory data is available for the month of March. Units Price per Unit Total Residential Pumps Inventory at Feb. 28: 200 \( 400 \) 80,000 Purchases: March 10 500 \( 450 \)225,000 March 20 400 \( 475 \)190,000 March 30 300 \( 500 \)150,000 Sales: March 15 500 \( 540 \)270,000 March 25 400 \( 570 \)228,000 Inventory at March 31: 500 Commercial Pumps Inventory at Feb. 28: 600 \( 800 \)480,000 Purchases: March 3 600 \( 900 \)540,000 March 12 300 \( 950 \)285,000 March 21 500 \(1,000 \)500,000 Sales: March 18 900 \(1,080 \)972,000 March 29 600 \(1,140 \)684,000 Inventory at March 31: 500 In addition to the above information, due to a downturn in the economy that has hit Englehart鈥檚 commercial customers especially hard, Englehart expects commercial pump prices from March 31 onward to be considerably different (and lower) than at the beginning of and during March. Englehart has developed the following additional information. Commercial Pumps Residential Pumps Net realizable value (per unit) \(900 \)580 The normal profit margin is 16.67% of cost. Englehart uses the FIFO accounting method. Accounting (a) Determine the dollar amount that Englehart should report on its March 31 balance sheet for inventory. Assume Englehart applies lower-of-cost-or-net realizable value at the individual product level. (b) Repeat part (a) but assume Englehart applies lower-of-cost-or-net realizable value at the major categories level. Englehart places both commercial and residential pumps into the same (and only) category. Analysis Which of the two approaches above (individual product level or major categories) for applying LCNRV do you think gives the financial statement reader better information? Principles Assume that during April, the net realizable value of commercial pumps rebounds to $1,050. (a) Briefly describe how Englehart will report in its April financial statements the inventory remaining from March 31. (b) Briefly describe the conceptual trade-offs inherent in the accounting in part (a).

Under IFRS, agricultural activity results in which of the following types of assets? I. Agricultural produce II. Biological assets (a) I only. (b) II only. (c) I and II. (d) Neither I nor II.

Deere and Company reported inventory in its balance sheet as follows. Inventories $1,999,100,000 What additional disclosures might be necessary to present the inventory fairly?

Garcia Home Improvement Company installs replacement siding, windows, and louvered glass doors for single-family homes and condominium complexes. The company is in the process of preparing its annual financial statements for the fiscal year ended May 31, 2017. Jim Alcide, controller for Garcia, has gathered the following data concerning inventory. At May 31, 2017, the balance in Garcia鈥檚 Raw Materials Inventory account was \(408,000, and Allowance to Reduce Inventory to NRV had a credit balance of \)27,500. Alcide summarized the relevant inventory cost and market data at May 31, 2017, in the schedule below. Alcide assigned Patricia Devereaux, an intern from a local college, the task of calculating the amount that should appear on Garcia鈥檚 May 31, 2017, financial statements for inventory under the LCNRV rule as applied to each item in inventory. Devereaux expressed concern over departing from the historical cost principle. Net Realizable Cost Sales Price Value Aluminum siding \( 70,000 \) 64,000 \( 56,000 Cedar shake siding 86,000 94,000 84,800 Louvered glass doors 112,000 186,400 168,300 Thermal windows 140,000 154,800 140,000 Total \)408,000 \(499,200 \)449,100 Instructions (a) Determine the proper balance in Allowance to Reduce Inventory to NRV at May 31, 2017. (b) For the fiscal year ended May 31, 2017, determine the amount of the gain or loss that would be recorded (using the loss method) due to the change in Allowance to Reduce Inventory to NRV. (c) Explain the rationale for the use of the LCNRV rule as it applies to inventories
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