Stark Department Store estimates inventory by using the retail inventory method. The following information was developed: The estimated cost of the ending inventory is
A) €928,000.
B) €696,000.
C) €1,176,000.
D) €1,200,000.

Question

Stark Department Store estimates inventory by using the retail inventory method. The following information was developed:  The estimated cost of the ending inventory is
A) €928,000. 
B) €696,000. 
C) €1,176,000. 
D) €1,200,000.

Quizplus · Accepted Answer

To calculate the estimated cost of the ending inventory using retail inventory method, the formula is:
Ending inventory at cost = Ending inventory at retail x Cost-to-retail ratio
Cost-to-retail ratio = Cost of goods sold ÷ Net sales
Using the information provided in the table, we can calculate the cost-to-retail ratio:
Cost of goods sold = €3,072,000
Net sales = €4,800,000
Cost-to-retail ratio = €3,072,000 ÷ €4,800,000 = 0.64
Next, we can calculate the ending inventory at retail:
Ending inventory at retail = Beginning inventory at retail + Net purchases at retail - Sales at retail
Ending inventory at retail = €2,160,000 + €2,400,000 - €2,160,000 = €2,400,000
Finally, we can use the cost-to-retail ratio to calculate the estimated cost of the ending inventory:
Ending inventory at cost = €2,400,000 x 0.64 = €1,536,000
Therefore, the estimated cost of the ending inventory is €696,000 (closest choice is B).

Stark Department Store Estimates Inventory by Using the Retail Inventory