TENTH CANADIAN EDITION Kieso Weygandt Warfield Young Wiecek McConomy INTERMEDIATE ACCOUNTING PREPARED BY: Dragan Stojanovic, CA Rotman School of Management, University of Toronto CHAPTER 8: Appendix 8A The Retail Inventory Method of Estimating Inventory Costs

2 Copyright © John Wiley & Sons Canada, Ltd. Retail Inventory Method: Given: At Cost At Retail Goods available $ 20,500 $ 36,000 Markups $ 3,000 Markup cancellations $ 1,000 Markdowns $ 2,500 Markdown cancellations $ 2,000 Sales (net) $ 25,000 Compute the cost-to-retail ratios

3 Copyright © John Wiley & Sons Canada, Ltd. Retail Inventory Method RATIO A: At Cost At Retail Goods available $ 20,500 $ 36,000 Add: Markups 3,000 Less: Markup cancellations ( 1,000) Goods available$ 20,500 $ 38,000 Cost-to-retail ratio ($20,500 ÷ $38,000) = 53.9% Ratio A (Conventional retail inventory method) reflects a cost % that includes net markups but excludes net markdowns

4 Copyright © John Wiley & Sons Canada, Ltd. Retail Inventory Method RATIO B: At Cost At Retail Goods available $ 20,500 $ 36,000 Add: Net Markups 2,000 Less: Markdowns ( 2,500) Markdown cancellations $ 2,000 Goods Available $ 20,500 $ 37,500 Cost-to-retail ratio ($20,500 ÷ $37,500) = 54.7% Ratio B incorporates both net markups and net markdowns

5 Copyright © John Wiley & Sons Canada, Ltd. Retail Inventory Method: Calculating Ending Inventory Ending Inventory (at cost) = Ending Inventory at Retail x Cost to Retail Ratio Goods Available (at retail)$36,000 Add: Net Markups 2,000 Less: Net Markdowns (500) Net Goods Available (at retail)$37,500 Less: Net Sales (at retail) 25,000 Ending Inventory (at retail)$12,500 Ratio A = $12,500 x 53.9% = $6, Ratio B = $12,500 x 54.7% = $6,837.50

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