8 Inventory Estimation
8 Inventory Estimation
8: INVENTORY ESTIMATION
Brian Christian S. Villaluz, CPA
FINANCIAL ACCOUNTING AND REPORTING
HAND-OUT NO. 8: Inventory Estimation
At year-end, unsold goods out on consignment with selling price of P1,000,000 are in the hands of a consignee.
All goods were completely destroyed except for partially damaged goods that normally sell for P100,000 and that had an
estimated net realizable value of P25,000 and undamaged goods that normally sell for P60,000.
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HAND-OUT NO. 8: INVENTORY ESTIMATION
Brian Christian S. Villaluz, CPA
RETAIL METHOD
This method is often used in the retail industry (e.g., supermarkets and department stores) for measuring large quantities
of inventories with rapidly changing items and with similar margins and for which it is impracticable to use other costing
methods. Net markups and net markdowns are considered in this method.
Cost Retail
Beginning inventory 650,000 1,200,000
Purchases 9,220,000 15,070,000
Freight in 200,000
Purchase returns 300,000 500,000
Purchases allowances 150,000
Departmental transfer in 320,000 560,000
Departmental transfer out 120,000 260,000
Markup 400,000
Markup cancellation 100,000
Markdown 1,200,000
Markdown cancellation 200,000
Sales 9,500,000
Sales discounts 100,000
Employee discounts 500,000
Estimated normal shoplifting loss 600,000
Estimated normal shrinkage 400,000
Abnormal spoilage 220,000 370,000
1. What is the estimated cost of ending inventory using the conservative approach?
A. 2,400,000 B. 2,460,000
C. 3,060,000 D. 2,700,000
2. What is the estimated cost of ending inventory using the average cost approach?
A. 2,560,000 B. 2,624,000
C. 3,264,000 D. 2,880,000
3. What is the estimated cost of ending inventory using the FIFO approach?
Problem 4: (Answer: A)
DDT Company had the following amounts all at retail:
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HAND-OUT NO. 8: INVENTORY ESTIMATION
Brian Christian S. Villaluz, CPA
Problem 5: (Retail Method; FIFO) (Answer: A)
Last Company used the FIFO retail method of inventory valuation. The company provided the following information for the
current year:
Cost Retail
Beginning inventory 600,000 1,500,000
Purchases 3,000,000 5,500,000
Net additional markups 500,000
Net markdowns 1,000,000
Sales revenue 4,500,000
3. To produce an inventory valuation which approximates the lower of cost and NRV using the retail method, the
computation of the ratio of cost to retail should
A. Include markups but not markdowns.
B. Include markups and markdowns.
C. Ignore both markups and markdowns.
D. Include markdowns but not markups.
END OF HANDOUT
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