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Chapter 9: Question 15Q (page 474)

What conditions must exist for the retail inventory method to provide valid results?

Short Answer

Expert verified

The conditions required are:

  • Maintain the record of total cost and retail value of inventories purchased.
  • Maintain the record cost and retail value of the cost of goods available for sale.
  • Maintain the record for current year’s sales

Step by step solution

01

Retail Inventory Method

The retail inventory method is an inventory valuation method in which inventory value at retail price is converted into cost price.

02

Conditions

The first condition is to prepare the proper record of inventories purchase. Both retail value and the cost price are required.

The second condition is related to the cost of goods available for sale, in which both retail and cost prices are required to be maintained.

Finally, the current year’s sales records are required to provide valid results in the inventory retail method.

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Most popular questions from this chapter

Question:What factors might call for inventory valuation at sales prices (net realizable value or market price)?

Kumar Inc. uses LIFO inventory costing. At January 1, 2017, inventory was \(214,000 at both cost and market value. At December 31, 2017, the inventory was \)286,000 at cost and $265,000 at market value. Prepare the necessary December 31 entry under (a) the cost-of-goods-sold method and (b) the loss method.

Question:Under what circumstances is relative sales value an appropriate basis for determining the price assigned to inventory?

Question:At December 31, 2017, Ashley Co. has outstanding purchase commitments for 150,000 gallons, at \(6.20 per gallon, of a raw material to be used in its manufacturing process. The company prices its raw material inventory at cost or market, whichever is lower. Assuming that the market price as of December 31, 2017, is \)5.90, how would you treat this situation in the accounts?

A fire destroys all of the merchandise of Assante Company on February 10, 2017. Presented below is information compiled up to the date of the fire. Inventory, January 1, 2017 $ 400,000 Sales revenue to February 10, 2017 1,950,000 Purchases to February 10, 2017 1,140,000 Freight-in to February 10, 2017 60,000 Rate of gross profit on selling price 40% What is the approximate inventory on February 10, 2017?
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