Problem 1 - Retail Method
Between The Ears is a popular Internet music store. During the current year, the company's cost of goods available for sale amounted to $462.000. The retail sales value of this merchandise amounted to $840,000. Sales for the year were $744,000.
At year-end, BTE takes a physical inventory. The general manager walks through the warehouse counting each type of product and reading its retail price into a recorder. From the recorded information, another employee prepares a schedule listing the entire ending inventory at retail sales prices. The schedule prepared for the current year reports ending inventory at $84.480 at retail sales prices.
a. Using the retail method, estimate (1) the cost of goods sold during the year and (2) the inventory at the end of the year.
b-1. Use the cost ratio computed in part a to reduce the inventory counted by the general manager from its retail value to an estimate of its cost.
b-2. Determine the estimated shrinkage losses {measured at cost) incurred by BTE during the year.
b-3. Compute BTE gross profit for the year. (Include inventory shrinkage losses in the cost of goods sold.)
Problem 2 - FIFO versus LIFO Comparisons
Walmart uses LIFO to account for its inventories. Recent financial statements were used to compile the following information (dollar figures are in millions):
Average inventory (throughout the year) - $ 42,259
Current assets (at year-end) - 59,940
Current liabilities (at year-end) - 71,818
Sales - 469,162
Cost of goods sold - 352,488
Gross profit - 116,674
Average time required to collect outstanding receivables (approximate) - 10 days
Instructions: Using the information provided, compute the following measures based upon the LIFO method:
a-1. Compute the inventory turnover rate.
a-2. Compute the current ratio.
a-3. Compute the gross profit rate.