(Retail, LIFO Retail, and Inventory Shortage) Late in 2010, Jerry Hassle and two other investors took the chain of Leys Department Stores private, and the company has just completed its fourth year of operations under the ownership of the investment group. The controller of Leys Department Stores, is in the process of preparing the year-end financial statements. Based on the preliminary financial statements, Hassle has expressed concern over inventory shortages, and he has asked the controller to determine whether an abnormal amount of theft and breakage has occurred. The accounting records of Leys Department
Stores contain the following amounts on October 31, 2014, the end of the fiscal year.
Cost Retail
Beginning inventory $124,000 $220,000
Purchases 530,000 864,000
Net markups 26,000
Net markdowns 79,000
Sales revenue 790,000
According to the October 31, 2014, physical inventory, the actual inventory at retail is $225,000.
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 Leys 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 October 31, 2014.
(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.