Universal Suppliers had sales of $471,000 in the month of June. Use the retail method to estimate the value of the inventory (in $) as of June 30 given the following financial information:
Universal Suppliers Financial Highlights June 1-June 30
| | Cost | Retail |
| :-------------------- | :--------- | :--------- |
| Beginning Inventory | $304,371 | $587,900 |
| Net Purchases (June) | 157,785 | 222,900 |
Answer (2)
Calculate total goods available at cost: $304,371 + 157,785 = 462 , 156 .
Calculate total goods available at retail: $587,900 + 222,900 = 810 , 800 .
Determine the cost-to-retail ratio: 810 , 800 462 , 156 = 0.57 .
Estimate ending inventory at cost: 0.57 × ( 810 , 800 − 471 , 000 ) = 193686 .
Explanation
Understanding the Problem We are asked to estimate the value of the ending inventory at cost using the retail method. We will follow these steps:
Calculate the total goods available for sale at cost.
Calculate the total goods available for sale at retail.
Calculate the cost-to-retail ratio.
Calculate the ending inventory at retail.
Estimate the ending inventory at cost.
Total Goods Available at Cost First, we calculate the total goods available for sale at cost by adding the beginning inventory at cost and the net purchases at cost: 304 , 371 + 157 , 785 = 462 , 156
Total Goods Available at Retail Next, we calculate the total goods available for sale at retail by adding the beginning inventory at retail and the net purchases at retail: 587 , 900 + 222 , 900 = 810 , 800
Cost-to-Retail Ratio Now, we calculate the cost-to-retail ratio by dividing the total goods available for sale at cost by the total goods available for sale at retail: 810 , 800 462 , 156 = 0.57
Ending Inventory at Retail We calculate the ending inventory at retail by subtracting the sales for June from the total goods available for sale at retail: 810 , 800 − 471 , 000 = 339 , 800
Ending Inventory at Cost Finally, we estimate the ending inventory at cost by multiplying the cost-to-retail ratio by the ending inventory at retail: 0.57 × 339 , 800 = 193 , 686
Final Answer Therefore, the estimated value of the inventory as of June 30 is $193 , 686 .
Examples
The retail method is useful for businesses that need to estimate their inventory value quickly, such as during interim financial reporting or in cases where taking a physical inventory count is impractical. For example, a large department store might use the retail method to estimate the value of its inventory at the end of each month. By tracking the cost and retail value of goods available for sale and the total sales, they can approximate the value of the remaining inventory without needing to count every item on the shelves. This allows them to make informed decisions about purchasing, pricing, and financial planning.
To estimate the inventory value of Universal Suppliers as of June 30, we calculated the total goods available at cost and at retail, determined the cost-to-retail ratio, found the ending inventory at retail, and then estimated the ending inventory at cost. The estimated value of the inventory is approximately $193,686. This method helps businesses efficiently evaluate their inventory without a physical count.
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