Stark Department Store estimates inventory by using the retail inventory method. The following information was developed: The estimated cost of the ending inventory is
A) €928,000.
B) €696,000.
C) €1,176,000.
D) €1,200,000.

Question

Stark Department Store estimates inventory by using the retail inventory method. The following information was developed:  The estimated cost of the ending inventory is
A) €928,000. 
B) €696,000. 
C) €1,176,000. 
D) €1,200,000.

Quizplus · Accepted Answer

Using the retail inventory method, we first need to calculate the cost-to-retail percentage (also known as the cost ratio) for the period by dividing the cost of goods sold by the net sales:
Cost-to-Retail Percentage = Cost of Goods Sold / Net Sales
= (€2,640,000 - €1,980,000) / €9,900,000
= €660,000 / €9,900,000
= 0.0667 or 6.67%

Next, we can use this cost ratio to calculate the estimated cost of ending inventory at retail prices and then convert it to cost prices by multiplying it with the cost ratio.

Estimated Ending Inventory at Retail Prices = Net Sales - Cost of Goods Sold
= €9,900,000 - €2,640,000
= €7,260,000

Estimated Ending Inventory at Cost Prices = Estimated Ending Inventory at Retail Prices x Cost-to-Retail Percentage
= €7,260,000 x 6.67%
= €485,022

However, the question asks for the estimated cost of ending inventory, not the cost of goods sold. Therefore, we need to subtract the estimated cost of goods sold from the cost of goods available for sale:

Estimated cost of ending inventory = Cost of goods available for sale - Estimated cost of goods sold
= €1,980,000 + €485,022 - €2,232,000
= €696,022

Therefore, the estimated cost of the ending inventory is €696,000, which is closest to option B.

Stark Department Store Estimates Inventory by Using the Retail Inventory