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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

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?

The records of Ellen鈥檚 Boutique report the following data for the month of April. Sales revenue \(99,000 Purchases (at cost) \)48,000 Sales returns 2,000 Purchases (at sales price) 88,000 Markups 10,000 Purchase returns (at cost) 2,000 Markup cancellations 1,500 Purchase returns (at sales price) 3,000 Markdowns 9,300 Beginning inventory (at cost) 30,000 Markdown cancellations 2,800 Beginning inventory (at sales price) 46,500 Freight on purchases 2,400 Instructions Compute the ending inventory by the conventional retail inventory method

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Gheorghe Moresan Lumber Company handles three principal lines of merchandise with these varying rates of gross profit on cost. Lumber 25% Millwork 30% Hardware and fittings 40% On August 18, a fire destroyed the office, lumber shed, and a considerable portion of the lumber stacked in the yard. To file a report of loss for insurance purposes, the company must know what the inventories were immediately preceding the fire. No detail or perpetual inventory records of any kind were maintained. The only pertinent information you are able to obtain are the following facts from the general ledger, which was kept in a fireproof vault and thus escaped destruction. Lumber Millwork Hardware Inventory, Jan. 1, 2017 \( 250,000 \) 90,000 $ 45,000 Purchases to Aug. 18, 2017 1,500,000 375,000 160,000 Sales revenue to Aug. 18, 2017 2,080,000 533,000 210,000 Exercises 479 480 Chapter 9 Inventories: Additional Valuation Issues Instructions Submit your estimate of the inventory amounts immediately preceding the fire.

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