Problem Solving Survival Guide to accompany Financial Accounting, 8th Edition

SOLUTION TO EXERCISE 6-10

Approach and Explanation:

Refer to the steps diagrammed in Illustration 6-1.

• (a)

  Step 1:	Compute the ending inventory at retail. This is done by determining the retail value of goods available for sale and deducting the retail value of goods no longer on hand (sales, estimated theft, etc.).
  Step 2:	Compute the cost to retail ratio. This is done by dividing the cost of goods available for sale by the retail value of the goods available for sale. The retail method approximates an average cost amount so both beginning inventory and net purchases information is used in the ratio.
  Step 3:	Determine the estimated cost of ending inventory. Apply the appropriate cost to retail ratio (Step 2) to the ending inventory at retail (Step 1).

TIP: The retail inventory method can be used only if sufficient information is accumulated and maintained. Purchases are recorded in the accounts at cost. Although not recorded in the accounts, the retail value of purchases must be recorded in supplemental records for use in inventory calculations utilizing the retail inventory method.