Neer Department Store uses the retail inventory method to estimate its monthly ending inventories. The following information is available for two of its departments at August 31, 2011.
Sporting Goods Jewelry and Cosmetics
Cost Retail Cost Retail
Net sales $1,000,000 $1,160,000
Purchases $675,000 1,066,000 $741,000 1,158,000
Purchase returns (26,000) (40,000) (12,000) (20,000)
Purchase discounts (12,360) — (2,440) —
Freight-in 9,000 — 14,000 —
Beginning inventory 47,360 74,000 39,440 62,000
At December 31, Neer Department Store takes a physical inventory at retail. The actual retail values of the inventories in each department are Sporting Goods $95,000, and Jewelry and Cosmetics $44,000.
Determine the estimated cost of the ending inventory for each department on August 31, 2011, using the retail inventory method. (Round ratio computations to 0 decimal places eg 54% and answers to 0 decimal places, e.g. 125.)
Compute the ending inventory at cost for each department at December 31, assuming the cost-to-retail ratios are 60% for Sporting Goods and 64% for Jewelry and Cosmetics.
Good
To determine the estimated cost of the ending inventory for each department on August 31, 2011, using the retail inventory method, we need to follow these steps:
1. Calculate the cost-to-retail ratio for each department:
- For Sporting Goods: Cost-to-Retail Ratio = Cost of Goods Sold / Retail Sales
- For Jewelry and Cosmetics: Cost-to-Retail Ratio = Cost of Goods Sold / Retail Sales
2. Calculate the cost of goods sold for each department:
- For Sporting Goods: Cost of Goods Sold = Retail Sales - Net Sales - Purchase Returns + Purchase Discounts + Freight-in
- For Jewelry and Cosmetics: Cost of Goods Sold = Retail Sales - Net Sales - Purchase Returns + Purchase Discounts + Freight-in
3. Calculate the estimated ending inventory at cost for each department:
- For Sporting Goods: Estimated Ending Inventory at Cost = Cost of Goods Available for Sale - Cost of Goods Sold
- For Jewelry and Cosmetics: Estimated Ending Inventory at Cost = Cost of Goods Available for Sale - Cost of Goods Sold
Let's calculate the estimated cost of the ending inventory for each department on August 31, 2011:
1. Calculate the cost-to-retail ratio for each department:
- For Sporting Goods: Cost-to-Retail Ratio = Cost of Goods Sold / Retail Sales = (Total Purchases - Purchase Returns + Purchase Discounts + Freight-in) / Retail Sales = (($675,000 - $26,000 - $12,360 + $9,000) / $1,160,000)
- For Jewelry and Cosmetics: Cost-to-Retail Ratio = Cost of Goods Sold / Retail Sales = (Total Purchases - Purchase Returns + Purchase Discounts + Freight-in) / Retail Sales = (($741,000 - $12,000 - $2,440 + $14,000) / $1,158,000)
2. Calculate the cost of goods sold for each department:
- For Sporting Goods: Cost of Goods Sold = Retail Sales - Net Sales - Purchase Returns + Purchase Discounts + Freight-in = ($1,160,000 - $1,000,000 - $40,000 + $0 + $0)
- For Jewelry and Cosmetics: Cost of Goods Sold = Retail Sales - Net Sales - Purchase Returns + Purchase Discounts + Freight-in = ($1,158,000 - $1,000,000 - $20,000 + $0 + $0)
3. Calculate the estimated ending inventory at cost for each department:
- For Sporting Goods: Estimated Ending Inventory at Cost = Beginning Inventory + Purchases - Purchase Returns - Purchase Discounts + Freight-in - Cost of Goods Sold = ($47,360 + $675,000 - $26,000 - $12,360 + $9,000 - Cost of Goods Sold)
- For Jewelry and Cosmetics: Estimated Ending Inventory at Cost = Beginning Inventory + Purchases - Purchase Returns - Purchase Discounts + Freight-in - Cost of Goods Sold = ($39,440 + $741,000 - $12,000 - $2,440 + $14,000 - Cost of Goods Sold)
Now that we have all the necessary calculations, we can substitute the values to find the estimated cost of the ending inventory for each department on August 31, 2011.