a. Compute the ending inventory at retail.

1) Excluding both markups and markdowns.

 

 

Beginning Inventory	107,300
Purchases	180,700
Total Inventory-retail	288,000
Less: Sales	187,090
Ending Inventory-retail	100,910

 

(2) Excluding markups but including markdowns.

 

 

Beginning Inventory	107,300
Purchases	180,700
Less: Net Markdowns	26,679
Total Inventory-retail	261,321
Less: Sales	187,090
Ending Inventory-retail	74,231

 

(3) Excluding markdowns but including markups.

 

 

Beginning Inventory	107,300
Purchases	180,700
Net Mark-ups	10,325
Total Inventory-retail	298,325
Less: Sales	187,090
Ending Inventory-retail	111,235

 

(4) Including both markdowns and markups.

 

 

Beginning Inventory	107,300
Purchases	180,700
Net Mark-ups	10,325
Less: Net Markdowns	26,679
Total Inventory-retail	271,646
Less: Sales	187,090
Ending Inventory-retail	84,556

 

b. Compute a cost-to-retail percentage under the following conditions.

 

(1) Excluding both markups and markdowns.

 

 

Beginning Inventory	61,600
Purchases	120,170
Total Inventory-Cost	181,770
Divided by: Total Inventory-retail	288,000
Cost to Retail Percentage	63%

 

(2) Excluding markups but including markdowns.

 

 

Total Inventory-Cost	181,770
Divided by: Total Inventory-retail	261,321
Cost to Retail Percentage	70%

 

(3) Excluding markdowns but including markups.

 

 

Total Inventory-Cost	181,770
Divided by: Total Inventory-retail	298,325
Cost to Retail Percentage	61%

 

(4) Including both markdowns and markups.

 

 

Total Inventory-Cost	181,770
Divided by: Total Inventory-retail	271,646
Cost to Retail Percentage	67%

 

c. Which of the methods in (b) above does the following?

(1) Provides the most conservative estimate of ending inventory.

 

The inventory costing that provides the most conservative approach is the one that includes markups but excludes markdowns.

 

(2) Provides an approximation of lower-of-cost-or-market.

 

The cost estimation that provides the lower of cost or market is the one that excludes mark downs and include mark ups. This is the reason; this costing method is called the lower of cost and net realizable value method or the conservative approach.

 

(3) Is used in the conventional retail method.

 

Again, the method that is used in conventional is the one that includes the mark ups and excludes the mark downs. Through this costing method, the entity applies the most conservative approach and inventories must be reported at lower of cost and net realizable value.

 

c. Compute ending inventory at lower-of-cost-or-market.

 

 

Ending Inventory-retail	111,235
Multiply by: Cost to retail percentage	61%
Ending Inventory-cost	67,775.70

 

d. Compute the cost of goods sold based on (d).

 

 

Total Inventory-cost	181,770
Less: Ending Inventory-cost	67,775.70
Cost of Goods Sold	113,994.30

 

e. Compute gross margin based on (d).

 

 

Sales	187,090
Less: Cost of Goods Sold	113,994.30
Gross Margin	73,095.70