Question

Hawkeye Auto Parts uses the average cost retail method to estimate inventories. Data for the first six months of 2018 include: beginning inventory at cost and retail were $55,000 and $100,000, net purchases at cost and retail were $785,000 and $1,300,000, and sales during the first six months totaled $800,000. The estimated inventory at June 30, 2018, would be:

Answer 1

Answer:

The estimated inventory at June 30, 2018, would be $360,000

Explanation:

The average cost retail method is an accounting method used to estimate the value of a store's merchandise. This method is based on the relationship between the cost of merchandise and its retail price and uses the cost-to-retail ratio.

Cost to retail ratio is calculated using the following formula:

Cost to Retail Ratio = (the cost of beginning inventory + the cost of inventory purchased)/(the retail value of beginning inventory + the retail value of goods purchased during the period)

In Hawkeye Auto Parts:

Cost to retail ratio = ($55,000 + $785,000)/($100,000 + $1,300,000) = 0.6

Sales during the first six months totaled $800,000.

Cost of goods sold = $800,000 x 0.6 = $480,000

Inventory at June 30, 2018 = $55,000 + $785,000 - $480,000 = $360,000