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Financial Accounting > Retail Inventory Method > Flashcards

Retail Inventory Method Flashcards

1
Q

What does PAS 2, paragraph 22, say about the Retail Inventory Method?

A

This method is often used in the retail industry for measuring inventory of numerous rapidly changing items with similar margin (or mark-up percentages), for which it is impracticable to use other costing methods. Practically, it is difficult to keep track of unit cost of a wide variety of goods at all times.

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2
Q

When can aggregating together different products with different cost and prices be justified?

A

It can be justified when the margin, that is the mark-up percentage, of each product are similar.

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3
Q

What does retail simply mean?

A

Selling price

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4
Q

What information does this method require?

A
  1. Beginning inventory at cost and at retail price.
  2. Purchases during the period at cost and at retail price.
  3. Adjustments to the original retail price.
  4. Other adjustments.
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5
Q

What are the adjustments to the retail price?

A
  1. Additional markup
  2. Markup cancelation
  3. Markdown
  4. Markdown cancelation
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6
Q

What are the other adjustments?

A
  1. Departmental transfer
  2. Breakage
  3. Shrinkage
  4. Theft
  5. Damaged goods
  6. Employee discount
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7
Q

Differentiate the formula for gross profit method from retail inventory method.

A

In the former, the ending inventory is stated at COST, while in the latter, the ending inventory is stated at SELLNG PRICE.

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8
Q

What is the basic formula for the retail method?

A

Goods available for sale at retail price
Less: Net sales (Gross sales minus sales return ONLY)
____________________________
Ending inventory at selling price
Multiply by cost ratio
____________________________
Ending inventory at cost
____________________________
____________________________

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9
Q

How do we compute cost ration in the basic formula for retail inventory method?

A

Goods available for sale at cost/Goods available for sale at selling price

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10
Q

What accounts deducted from purchases are only allowed to be valued at cost and retail?

A

Purchase returns and departmental transfer out or credit

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11
Q

What is the treatment of the purchase discount item?

A

To be deducted from purchases at cost only

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12
Q

What is the treatment of the purchase allowance item?

A

To be deducted from purchases at cost only

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13
Q

What is the treatment of the purchase return item?

A

To be deducted from purchases at cost and retail

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14
Q

What is the treatment of freight in?

A

To be added to purchases at cost only

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15
Q

What is the treatment of departmental transfer in or debit

A

To be added to purchases at cost and at retail

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16
Q

What is the treatment of departmental transfer out or credit?

A

To be deducted from purchases at cost and retail

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17
Q

What is the treatment of sales allowances?

A

To be disregarded

18
Q

What is the treatment of sales discounts?

A

To be disregarded

19
Q

What is the treatment of sales returns?

A

To be deducted from sales

20
Q

What is the treatment of freight in?

A

To be added to sales

21
Q

What if the account used is “sales return and allowance”?

A

It is to be deducted from sales

22
Q

What is the treatment of employee discounts? Why?

A

They are to be added to sales because they are usually not recorded and have already been deducted from the gross sales price, the resulting net sales being the one presented. This makes the net sales inherently understated, so the proper adjustment is to add them back.

23
Q

What is the treatment of normal shortage, shrinkage, spoilage, and breakages? Why?

A

They are to be deducted from goods available for sale at retail because normal shortage is usually absorbed in the cost of goods sold.

24
Q

What is the treatment of abnormal shortage, shrinkage, spoilage, and breakages? Why?

A

They are to be deducted from goods available for sale at retail and cost to avoid distorting the cost ratio because they are reported separately as a loss.

25
Q

What do replacement costs mean?

A

Replacement costs refer to the amount of money a business must spend to replace inventory with similar or comparable items.

26
Q

What would happen to the original sales price at the end of the selling season where replacement costs are changing?

A

They would be frequently raised or lowered.

27
Q

Explain initial mark-up.

A

It is an item related to the retail inventory method that refers to the original markup on the cost of goods.

28
Q

Define Original retail.

A

It is an item related to the retail inventory method that refers to the sales price at which the goods are FIRST offered for sale.

29
Q

Define Additional markup.

A

It is an item related to the retail inventory method that refers to the increase in sales price above the original sales price.

30
Q

Define markup cancelation.

A

It is an item related to the retail inventory method that refers to the decrease in sales price that does not decrease the sales price below the original selling price.

31
Q

Define net additional markup or net markup.

A

It is an item related to the retail inventory method that refers to the difference between the additional markup and the markup cancelation.

32
Q

Define markdown.

A

It is an item related to the retail inventory method that refers to the decrease in sales price below the original sales price.

33
Q

Define markdown cancelation.

A

It is an item related to the retail inventory method that refers to the increase in sales price that does not increase the sales price above the original sales price.

34
Q

Define net markdown.

A

It is an item related to the retail inventory method that refers to the difference been the markdown and the markdown cancelation.

35
Q

Define maintained markup.

A

It is an item related to the retail inventory method that refers to the difference between the overall sales price after all adjustments to cost less the original cost.

36
Q

What is another term for “maintained markup”?

A

Markon.

37
Q

What are the three approaches in the use of the inventory retail method?

A
  1. Conservative or conventional or lower of cost and net realizable value approach
  2. Average cost approach
  3. FIFO approach
38
Q

What is the rationale for all the three approaches of the inventory retail method?

A

To obtain the appropriate inventory value

39
Q

List down items of adjustments in the Cost of Sales statement under retail inventory method.

A
  1. Purchase discount
  2. Purchase return
  3. Purchase allowance
  4. Freight in
  5. Departmental transfer in or debit
  6. Departmental transfer out or credit
  7. Sales discount
  8. Sales allowance
  9. Sales return/sales return and allowance
  10. Employee discounts
  11. Normal shortage, shrinkage, spoilage, breakage
  12. Abnormal shortage, shrinkage, spoilage, breakage
40
Q

List down items of adjustments to cost.

A
  1. Initial markup
  2. Original retail
  3. Additional markup
  4. Markup cancelation
  5. Net additional markup or net markup
  6. Markdown
  7. Markdown cancelation
  8. Net markdown
  9. Maintained markup/markon
41
Q
A

Financial Accounting (4 decks)

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