Question

Exercise 9-20 Presented below is information related to Ayayai Company. Cost Retail Beginning inventory $ 54,050 $103,100 Purchases (net) 115,680 196,600 Net markups 10,547 Net markdowns 23,798 Sales revenue 202,850 Compute the ending inventory at retail. Ending inventory $ Link to Text Compute a cost-to-retail percentage under the following conditions. (Round ratios to 2 decimal places, e.g. 78.74%) Cost-to-retail percentage (1) Excluding both markups and markdowns. % (2) Excluding markups but including markdowns. % (3) Excluding markdowns but including markups. % (4) Including both markdowns and markups. % Link to Text Which of the methods in (b) above does the following? (1) Provides the most conservative estimate of ending inventory. (2) Provides an approximation of lower-of-cost-or-market. (3) Is used in the conventional retail method. Link to Text Compute ending inventory at lower-of-cost-or-market. (Round ratio to 2 decimal places, e.g. 78.74% and final answer to 0 decimal places, e.g. 6,225.) Ending inventory $ Link to Text Compute cost of goods sold based on (d). (Round answer to 0 decimal places, e.g. 6,225.) Cost of goods sold $ Link to Text Compute gross margin based on (d). (Round answer to 0 decimal places, e.g. 6,225.) Gross margin $

Answer 1

Solution:

	Cost	Retail
Beginning inventory	$54,050	$103,100
Purchases	115,680	196,600
Net Markups		10,547
Net Markdowns		(23,798)
Inventory available to sale		$286,449
Less: Sales		(202,850)
Ending inventory at retail		$83,599
(1)Cost to retail ratio  (54,050+115,680) / (103,100+196,600)	56.63%
(2)Cost to retail ratio (54,050+115,680) / (103,100+196,600 - 23,798)	61.52%
(3)Cost to retail ratio  (54,050+115,680) / (103,100+196,600+10,547)	54.71%
(4)Cost to retail ratio  (54,050+115,680) / (103,100+196,600+10,547- 23,798)	59.25%
(b) Using no. 3rd cost to retail ratio i.e Including markups but excluding markdown provides most conservative estimate of ending inventory
Estimated cost of Ending inventory ($83,599* 54.71%)	$45,737

COGS using this ratio = Beg. inventory + purchases - Ending inventory

= $54,050 + 115,680 - 45,737 = $123,993

Gross margin = Sales - COGS = $202,850 - 123,993 = $78,857