Question: Retail, LIFO Retail, and Inventory Shortage
Late in 2014, Joan Seceda and four other investors took the chain of Becker Department Stores private, and the company has just completed its third year of operations under the ownership of the investment group. Andrea Selig, controller of Becker Department Stores, is in the process of preparing the year-end financial statements. Based on the preliminary financial statements, Seceda has expressed concern over inventory shortages, and she has asked Selig to determine whether an abnormal amount of theft and breakage has occurred. The accounting records of Becker Department Stores contain the following amounts on November 30, 2017, the end of the fiscal year.
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Cost
|
Retail
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|
Beginning inventory
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$68,000
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$100,000
|
|
Purchases
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255,000
|
400,000
|
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Net markups
|
|
50,000
|
|
Net markdowns
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|
110,000
|
|
Sales revenue
|
|
320,000
|
According to the November 30, 2017, physical inventory, the actual inventory at retail is $115,000.
Instructions: a) Describe the circumstances under which the retail inventory method would be applied and the advantages of using the retail inventory method.
b) Assuming that prices have been stable, calculate the value, at cost, of Becker Department Stores' ending inventory using the last-in, first-out (LIFO) retail method. Be sure to furnish supporting calculations.
c) Estimate the amount of shortage, at retail, that has occurred at Becker Department Stores during the year ended November 30, 2017.
d) Complications in the retail method can be caused by such items as (1) freight-in costs, (2) purchase returns and allowances, (3) sales returns and allowances, and (4) employee discounts. Explain how each of these four special items is handled in the retail inventory method.