Question :
Late in 2009, 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 financial statements, Seceda has expressed concern over inventory shortages, and she has asked Selig to evaluate whether an abnormal amount of theft and breakage has occurred. The accounting records of Becker Department Stores contain the given amounts on November 30, 2012, the end of the fiscal year.
Cost
Retail
Beginning inventory
$ 68,000
$100,000
Purchases
255,000
400,000
Net markups
50,000
Net markdowns
110,000
Sales revenue
320,000
According to the November 30, 2012, physical inventory, the actual inventory at retail is $115,000.
Instructions
(a)
Explain the circumstances under which the retail inventory method would be applied and the advantages of using the retail inventory method.
(b)
Consider that prices have been stable, determine 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)
Evaluate the amount of shortage, at retail, that has occurred at Becker Department Stores during the year ended November 30, 2012.
(d)
Complications in the retail method will be caused by such items as (1) freight-in costs, (2) purchase returns and allowances, (3) allowances and sales returns , and (4) employee discounts. Describe how each of these four special items is handled in the retail inventory method.