prices, will help identify inventory shortages resulting from

shoplifting and other causes. Management can then take

appropriate actions.

The retail method can also be used with the periodic

system when a physical inventory is taken at the end of the

year. In such a case, the items counted are recorded on the

inventory sheets at their retail (selling) prices instead of

their cost prices. The physical inventory at selling price is

then converted to cost by applying the ratio of cost to

selling (retail) price for the merchandise available for sale.

To illustrate, assume that the data in Exhibit 9 are for

an entire fiscal year rather than for only January. If the

physical inventory taken at the end of the year totaled L.E

29000, priced at retail, it would be this amount rather than

the L.E 30000 that would be converted to cost. Thus, the

inventory at cost would be L.E 17980 (L.E 29000 × 62%)

instead of L.E 18600 (L.E 30000 × 62%). The L.E 17980

would be used for the year-end financial statements and for

income tax purposes.

Chapter Four: Inventories and the cost of goods sold

196

Questions & Exercises:

Q1: X Co. uses a periodic inventory system. During the

first year of operations, the company made four

purchases of particular product. Each purchase was

for 500 units and the prices paid were: L.E 9 per unit

in the first purchase, L.E 10 per unit in the second

purchase. L.E 12 per unit in the third purchase, and

L.E 13 per unit in the fourth purchase. At year-end,

650 of these units remained unsold. The cost of

goods sold under FIFO and LIFO method were as

follows respectively.

a. L.E 13700 (FIFO) and L.E 16000 (LIFO).

b. L.E 8300 (FIFO) and L.E 6000 (LIFO)

c. L.E 16000 (FIFO) and L.E 13700 (LIFO)

d. L.E 6000 (FIFO) and L.E 8300 (LIFO)

Q2: Condensed versions of the income statements for

Gross Company for the past two fiscal years ended

December 31 are as follows: