Question

Kiddie World uses a periodic inventory system and the retail inventory method to estimate ending inventory and cost of goods sold. The following data are available for the quarter ending September 30, 2021:

Cost Retail
Beginning inventory $430,000 $565,000
Net purchases 920,000 1,340,000
Freight-in 62,550
Net markups 61,000
Net markdowns 31,000
Net sales 1,265,000
Estimate ending inventory and cost of goods sold (average cost).

Answer 1

1. Cost to retail ratio = Cost of goods available for sale/ Retail value of goods available for sale

- Cost of goods available for sale = $430000 + $920000 + $62550 = $1412550

- Retail Value of goods available for sale = Retail value of inventory + Net Markup - Net Markdown = $565000 + $1340000 + $61000 - $31000 = $1935000

Cost to retail ratio = Cost of goods available for sale/Retail value of goods available for sale = ($1412550/$1935000)*100 = 73%

Sales value at retail = $1265000

So, Cost Of goods Sold = Sales Value at retail*Cost to retail ratio = $1265000*73% = $923,450

2. Ending Inventory Retail Value = Retail value of goods available for sale-Sales value at retail = $1935000 - $1265000 = $670,000

So, Cost of ending inventory = Ending inventory value at retail*Cost to retail ratio = $670000*73% = $489,100