Question:The conventional retail inventory method yields results that are essentially the same as those yielded by the lower-of-cost-or-market method. Explain. Prepare an illustration of how the retail inventory method reduces inventory to market.

Under the conventional retail method, ending inventory at cost is estimated by multiplying the cost-to-retail percentage by ending inventory at retail. This ending inventory at cost is taken as market value, compared with ending inventory at retail.

Ending inventory at cost is always lower than the ending inventory at retail, which is the same as the value estimated under Lower-of-cost-or-market.

For example, ending inventory at cost is calculated using the conventional retail method for the following.

Ending inventory at retail is calculated as follows

Cost to retail ratio is calculated as follows:

$$\begin{gathered} \mathit{C}\mathit{o}\mathit{s}\mathit{t}\mathbf{}\mathit{t}\mathit{o}\mathbf{}\mathit{R}\mathit{e}\mathit{t}\mathit{a}\mathit{i}\mathit{l}\mathbf{}\mathit{r}\mathit{a}\mathit{t}\mathit{i}\mathit{o}\mathbf{=}\frac{\mathbf{I}\mathbf{n}\mathbf{v}\mathbf{e}\mathbf{n}\mathbf{t}\mathbf{o}\mathbf{r}\mathbf{y}\mathbf{}\mathbf{a}\mathbf{t}\mathbf{}\mathbf{cos}\mathbf{t}}{\mathbf{I}\mathbf{n}\mathbf{v}\mathbf{e}\mathbf{n}\mathbf{t}\mathbf{o}\mathbf{r}\mathbf{y}\mathbf{}\mathbf{a}\mathbf{t}\mathbf{}\mathbf{r}\mathbf{e}\mathbf{t}\mathbf{a}\mathbf{i}\mathbf{l}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\frac{\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{575}\mathbf{.}\mathbf{000}}{\mathbf{\$}\mathbf{2}\mathbf{.}\mathbf{500}\mathbf{,}\mathbf{000}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{63}\mathbf{\%} \end{gathered}$$

Inventory at cost is calculated as follows:

$$\begin{gathered} \mathbf{}\mathit{E}\mathit{n}\mathit{d}\mathit{i}\mathit{n}\mathit{g}\mathbf{}\mathit{i}\mathit{n}\mathit{v}\mathit{e}\mathit{n}\mathit{t}\mathit{o}\mathit{r}\mathit{y}\mathbf{}\mathit{a}\mathit{t}\mathbf{}\mathit{c}\mathit{o}\mathit{s}\mathit{t}\mathbf{=}\mathit{I}\mathit{n}\mathit{v}\mathit{e}\mathit{n}\mathit{t}\mathit{o}\mathit{r}\mathit{y}\mathbf{}\mathit{a}\mathit{t}\mathbf{}\mathit{r}\mathit{e}\mathit{t}\mathit{a}\mathit{i}\mathit{l}\mathbf{}\mathbf{\times }\mathit{C}\mathit{o}\mathit{s}\mathit{t}\mathbf{}\mathbf{-}\mathit{t}\mathit{o}\mathbf{-}\mathit{r}\mathit{e}\mathit{t}\mathit{a}\mathit{i}\mathit{l}\mathbf{}\mathit{r}\mathit{a}\mathit{t}\mathit{i}\mathit{o} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{370}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{63}\mathbf{\%} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{233}\mathbf{,}\mathbf{100} \end{gathered}$$

In the example, inventory at cost equals $233,100, and inventory at retail (market) equals $370,000. Per the lower-of-cost-or-market, the value of inventory is $233,100, which is the same under both methods.