RETAIL INVENTORY METHOD
1. Which statement is incorrect regarding the retail inventory method?
a. The retail method is often used in the retail industry for measuring inventories of
large numbers of rapidly changing items with similar margins for which it is
impracticable to use other costing methods.
b. The cost of the inventory is determined by reducing the sales value of the
inventory by the appropriate percentage gross margin.
c. The percentage used takes into consideration inventory that has been marked
down to below its original selling price.
d. A percentage computed using conventional retail is required for each retail
department.
Use the following information for the next four questions.
Pugo uses the retail inventory method. The following information is available for the
current year:
Cost Retail
Beginning inventory P 1,300,000 P 2,600,000
Purchases 18,000,000 29,200,000
Freight in 400,000
Purchase returns 600,000 1,000,000
Purchase allowances 300,000
Departmental transfer in 400,000 600,000
Net markups 600,000
Net markdowns 2,000,000
Sales 24,700,000
Sales returns 350,000
Sales discounts 200,000
Employee discounts 600,000
Loss from breakage 50,000
2. The estimated cost of inventory at the end of the current year using the conventional
(lower of cost or market) retail inventory method is
a. P3,200,000
b. P3,000,000
c. P3,250,000
d. P3,360,000
3. The estimated cost of inventory at the end of the current year using the average retail
inventory method is
a. P3,200,000
b. P3,000,000
c. P3,250,000
d. P3,584,000
4. The estimated cost of inventory at the end of the current year using the FIFO retail
inventory method is
a. P3,200,000
b. P3,000,000
c. P3,250,000
d. P3,658,480
5. Which method results in the highest cost of sales?
a. Conventional
b. Average
c. FIFO
d. Cannot be determined from the information given.
6. The records of ABC’s Department Store report the following data for the month of
January:
Beginning inventory at cost P 440,000
Beginning inventory at sales price 800,000
Purchases at cost 4,500,000
Initial markup on purchases 2,900,000
Purchase returns at cost 240,000
Purchase returns at sales price 350,000
Freight on purchases 100,000
Additional markup 250,000
Markup cancellations 100,000
Markdown 600,000
Markdown cancellations 100,000
Net sales 6,500,000
Sales allowances 100,000
Sales returns 500,000
Employee discounts 200,000
Theft and other losses 100,000
Using the average retail inventory method, ABC’s ending inventory at cost is
a. P360,000
b. P384,000
c. P420,000
d. P448,000
