Question

EXERCISE 8.10 Estimating Inventory by the Retail Method Phillips Supply uses a periodic inventory system but needs to determine the approximate amount of inventory at the end of each month without taking a physical inventory. Phillips has provided the following inventory data. Cost Price Retail Selling Price Inventory of merchandise, June 30 $300,000 $500,000 Purchases during July 222,000 400,000 Goods available for sale during July $522,000 $900,000 Net sales during July $600,000 Estimate the cost of goods sold and the cost of the July 31 ending inventory using the retail method of evaluation. Was the cost of Phillips’s inventory, as a percentage of retail selling prices, higher or lower in July than it was in June? Explain.

Answer 1

The retail method of inventory estimation can be used to estimate the cost of goods sold and the ending inventory. In this case, the cost-to-retail ratio for July is 0.58. The cost of Phillips's inventory, as a percentage of retail selling prices, was higher in July than it was in June.

Step-by-step explanation:

The retail method of inventory estimation can be used to determine the approximate amount of inventory at the end of each month without taking a physical inventory. To estimate the cost of goods sold and the cost of the July 31 ending inventory, we need to calculate the cost-to-retail ratio. The cost-to-retail ratio is derived by dividing the cost price by the retail selling price.

In this case, the cost-to-retail ratio for July is $522,000 / $900,000 = 0.58. Now we can use this ratio to estimate the cost of goods sold and the ending inventory.

The cost of goods sold for July is calculated by multiplying the net sales by the cost-to-retail ratio: $600,000 * 0.58 = $348,000. The cost of the July 31 ending inventory is calculated by multiplying the retail selling price of the unsold merchandise on July 31 by the cost-to-retail ratio: ($500,000 + $400,000 - $600,000) * 0.58 = $290,000.

The cost of Phillips's inventory, as a percentage of retail selling prices, was higher in July than it was in June. This is because the cost-to-retail ratio for July (0.58) is higher than the cost-to-retail ratio for June (0.60), indicating that the cost of inventory relative to retail selling prices increased.

Answer 2

Yes that is correct:)))