Question

Hutch, Inc., uses the conventional retail inventory method to account for inventory. The following information relates to current year's operations:

Average
Cost/ Retail
Beginning inventory and purchases $600,000/$920,000
Net markups 40,000/
Net markdowns 60,000/
Sales 780,000/
What amount should be reported as cost of sales for the year?
a) $480,000
b) $487,500
c) $500,000
d) $525,000

Answer 1

To calculate the cost of sales, determine the ending inventory using the conventional retail inventory method. Subtract the ending inventory from the sum of beginning inventory and purchases to find the cost of sales.

Step-by-step explanation:

The conventional retail inventory method is used by Hutch, Inc. to account for inventory. To calculate the cost of sales for the year, we need to determine the ending inventory.

The formula to calculate ending inventory is:

Ending Inventory = Beginning Inventory + Purchases - Sales + Net Markup - Net Markdown

Given the information provided, we can calculate the ending inventory as follows:

1. Beginning Inventory = $600,000
2. Purchases = $920,000
3. Sales = $780,000
4. Net Markup = $40,000
5. Net Markdown = $60,000
6. Ending Inventory = $600,000 + $920,000 - $780,000 + $40,000 - $60,000 = $720,000

The cost of sales for the year can be calculated by subtracting the ending inventory from the sum of beginning inventory and purchases:

Cost of Sales = Beginning Inventory + Purchases - Ending Inventory = $600,000 + $920,000 - $720,000 = $800,000

Therefore, the correct answer is option d) $525,000.