Inventories: Additional Valuation Issues9 - 1145.To produce an inventory valuation which approximates the lower of cost or market usingthe conventional retail inventory method, the computation of the ratio of cost to retailshould Show
Get answer to your question and much more *46.When calculating the cost ratio for the retail inventory method, Get answer to your question and much more S47.Which of the following is not required when using the retail inventory method? Get answer to your question and much more S48.Which of the following is not a reason the retail inventory method is used widely?a.As a control measure in determining inventory shortagesb. For insurance informationc.To permit the computation of net income without a physical count of inventoryd. To defer income tax liability P49.Which of the following statements is false regarding an assumption of inventory cost flow? Get answer to your question and much more What Is the Retail Inventory Method?The retail inventory method is an accounting method used to estimate the value of a store's merchandise. The retail method provides the ending inventory balance for a store by measuring the cost of inventory relative to the price of the merchandise. Along with sales and inventory for a period, the retail inventory method uses the cost-to-retail ratio. Key Takeaways
Understanding the Retail Inventory MethodHaving a handle on your inventory is an important step in managing a successful business. It allows you to understand your sales, when to order more inventory, how to manage the cost of your inventory, as well as how much of your inventory is making it into the hands of consumers, as opposed to being stolen or broken. The retail inventory method should only be used when there is a clear relationship between the price at which merchandise is purchased from a wholesaler and the price at which it is sold to customers. For example, if a clothing store marks up every item it sells by 100% of the wholesale price, it could accurately use the retail inventory method, but if it marks up some items by 20%, some by 35%, and some by 67%, it can be difficult to apply this method with accuracy. The retail method of valuing inventory only provides an approximation of inventory value since some items in a retail store will most likely have been shoplifted, broken, or misplaced. It's important for retail stores to perform a physical inventory valuation periodically to ensure the accuracy of inventory estimates as a way to support the retail method of valuing inventory. Calculating Ending Retail InventoryThe retail inventory method calculates the ending inventory value by totaling the value of goods that are available for sale, which includes beginning inventory and any new purchases of inventory. Total sales for the period are subtracted from goods available for sale. The difference is multiplied by the cost-to-retail ratio (or the percentage by which goods are marked up from their wholesale purchase price to their retail sales price). The cost-to-retail ratio, also called the cost-to-retail percentage, provides how much a good's retail price is made up of costs. If, for example, an iPhone costs $300 to manufacture and it sells for $500 each, the cost-to-retail ratio is 60% (or $300/$500) * 100 to move the decimal. Disadvantages of the Retail Inventory MethodThe retail inventory method's primary advantage is the ease of calculation, but some of the drawbacks include:
Example of the Retail Inventory MethodUsing our earlier example, the iPhone costs $300 to manufacture and it sells for $500. The cost-to-retail ratio is 60% ($300/$500 * 100). Let's say that the iPhone had total sales of $1,800,000 for the period.
On what assumption is the retail inventory method based?Retail Inventory Method
The retail method can be used with FIFO, LIFO, or the weighted average cost flow assumption. It is based on the (known) relationship between cost and retail prices of inventory. In addition it is used in conjunction with the dollar value LIFO method.
What is the retail method?The retail method provides the ending inventory balance for a store by measuring the cost of inventory relative to the price of the merchandise. Along with sales and inventory for a period, the retail inventory method uses the cost-to-retail ratio.
Why are inventories stated at lower of cost or net realizable value?The lower of cost or realizable value rule is associated with the conservatism principle. This principle holds that one should recognize expenses and liabilities as soon as possible when there is uncertainty about the outcome, but only recognize revenues and assets when they are assured of being received.
Which inventory costing method most closely approximates current cost for ending inventory?Explanation: The first-in-first out method assumes that the oldest inventory is sold first and leaves the most current inventory purchases in ending inventory. The last-in-first-out (LIFO) method assumes that the most recent inventory is sold first resulting in the current cost being recorded to cost of goods sold.
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Which inventory method approximates inventory valuation at the lower of cost or market?
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