Chapter 9 inventories: additional issues Sommers – ACCT 3311Retail Inventory MethodInventory NotationIntroduction to Conventional Retail MethodIntroduction to Conventional Retail MethodExample 4: Conventional Retail MethodExample 4: ConventionalInventory Disclosures (CVS from MD&A)LIFO Retail Inventory MethodExample 5: LIFO Retail InventoryExample 5: ContinuedInventory Disclosures (Walmart from MD&A)Inventory Disclosures (Walmart from MD&A)Dollar-Value LIFO RetailExample 6: Dollar-Value LIFO Retail MethodExample 6: ContinuedExample 6: ContinuedEvaluation of Retail Inventory MethodIFRSIFRSIFRSLIFO to FIFO Conversion – Dow ChemicalCHAPTER 9 INVENTORIES:ADDITIONAL ISSUESSommers – ACCT 3311Retail Inventory MethodExplain the retail inventory method of estimating ending inventory.Inventory NotationBeginningBalanceCost of Goods Available for SaleCost of Goods SoldEndingBalancePurchases? ?Introduction to Conventional Retail MethodSmith-Kline Company maintains inventory records at selling prices as well as at cost. For 2011, the records indicate the following data:Cost RetailBeginning inventory $ 80 $ 125Purchases 671 1,006Freight-in on purchases 30Purchase returns 1 2Net markups 4Net markdowns 8Net sales 916Use the conventional retail method to approximate cost of ending inventory.Introduction to Conventional Retail MethodCost RetailBeginning inventory $ 80 $ 125Purchases 671 1,006Freight-in on purchases 30Purchase returns (1) (2)Net markups 4Goods available for sale 780 1,133Cost-to-retail percentages:Conventional cost ratio: $780 / $1,133 = 68.84%Deduct: Net sales (916) Net markdowns (8)Ending inventory at retail $ 209Ending inv at cost ($209 x 68.84%) $144Example 4: Conventional Retail MethodSparrow Company uses the retail inventory method to estimate ending inventory and cost of goods sold. Data for 2011 are as follows: Cost RetailBeginning inventory $ 90,000 $180,000Purchases 355,000 580,000Freight-in 9,000Purchase returns 7,000 11,000Net markups 16,000Net markdowns 12,000Normal spoilage 3,000Abnormal spoilage 4,800 8,000Sales 540,000Sales returns 10,000The company records sales net of employee discounts. Discounts for 2011 totaled $4,000. Estimate Sparrow’s ending inventory and cost of goods sold for the year using the conventional retail inventory methodExample 4: Conventional Cost RetailBeginning inventory Plus: Purchases Freight-in Less: Purchase returns Plus: Net markups Less: Abnormal spoilageCost-to-retail percentage:Less: Net markdownsGoods available for sale Normal spoilage Sales: Net sales Employee discountsEstimated ending inventory at retail Estimated ending inventory at costEstimated cost of goods soldInventory Disclosures (CVS from MD&A)InventoryOur inventory is stated at the lower of cost or market on a first-in, first-out basis using the retail method of accounting to determine cost of sales and inventory in our CVS/pharmacy stores, weighted average cost to determine cost of sales and inventory in our mail service and specialty pharmacies and the cost method of accounting on a first-in, first-out basis to determine inventory in our distribution centers. Under the retail method, inventory is stated at cost, which is determined by applying a cost-to-retail ratio to the ending retail value of our inventory. Since the retail value of our inventory is adjusted on a regular basis to reflect current market conditions, our carrying value should approximate the lower of cost or market. In addition, we reduce the value of our ending inventory for estimated inventory losses that have occurred during the interim period between physical inventory counts.LIFO Retail Inventory MethodWhen applying LIFO, if inventory increases during the year, none of the beginning inventory is assumed sold. Ending inventory includes the beginning inventory plus the current year’s layer. To determine layers, we compare ending inventory at retail to beginning inventory at retail and assume that no more than one inventory layer is added if inventory increases. Each layer carries its own cost-to-retail percentage that is used to convert each layer from retail to cost.Example 5: LIFO Retail InventoryCrosby Company owns a chain of hardware stores throughout the state. The company uses a periodic inventory system and the retail inventory method to estimate ending inventory and cost of goods sold. The following data are available for the three months ending March 31, 2011: Cost RetailBeginning inventory $ 160,000 $ 280,000Net purchases 607,760 840,000Net markups 20,000Net markdowns 4,000Net sales 800,000Estimate the LIFO cost of ending inventory and cost of goods sold for the three months ending March 31, 2011. Assume stable retail prices during the period.Example 5: Continued Cost RetailBeginning inventory Plus: Net purchases Net markups Less: Net markdowns Goods available for sale (excl. beg. Inventory)Cost-to-retail percentage:Goods available for sale (incl. beg. Inventory)Less: Net sales Estimated ending inventory at retail Estimated ending inventory at cost: Retail CostBeginning inventoryCurrent period’s layer Total Estimated cost of goods soldInventory Disclosures (Walmart from MD&A)InventoriesThe Company values inventories at the lower of cost or market as determined primarily by the retail method of accounting, using the last-in, first-out (“LIFO”) method for substantially all of the Walmart U.S. segment’s merchandise inventories. The retail method of accounting results in inventory being valued at the lower of cost or market since permanent markdowns are currently taken as a reduction of the retail value of inventory. The Sam’s Club segment’s merchandise is valued based on the weighted-average cost using the LIFO method. Inventories for the Walmart International operations are primarily valued by the retail method of accounting and are stated using the first-in, first-out (“FIFO”) method. At January 31, 2011 and 2010, our inventories valued at LIFO approximated those inventories as if they were valued at FIFO.Inventory Disclosures (Walmart from MD&A)Inventories (Continued)Under the retail method, inventory is stated at cost, which is determined by applying a cost-to-retail ratio to each merchandise grouping’s retail value. The FIFO cost-to-retail ratio is