04.07.2022 - 14:04

The conventional retail inventory method yields results that are essentially the same as those yielded by the lower-of-cost-or-market method. Explain. Prepare an illustration of how the retail inventory method reduces inventory to market.

Question:

The conventional retail inventory method yields results that are essentially the same as those yielded by the lower-of-cost-or-market method. Explain. Prepare an illustration of how the retail inventory method reduces inventory to market.

The conventional retail inventory method is a way to value inventory based on its selling price, rather than its original cost. It involves calculating the cost-to-retail percentage by dividing the cost of goods available for sale by their retail value, and then applying this percentage to the total inventory at retail value to determine the estimated cost of inventory. On the other hand, the lower-of-cost-or-market method requires inventory to be valued at the lower of its original cost or its market value, which is determined by comparing the cost of replacement or the estimated selling price. While these two methods may seem different, they ultimately yield similar results because the retail inventory method takes into account current market trends and markdowns in its calculation of cost-to-retail percentage, which means that the estimated cost of inventory will be at or below its market value. Therefore, when applying the lower-of-cost-or-market method, it is likely that the calculated market value will be close to, if not the same as, the estimated cost of inventory under the retail inventory method. To illustrate how the retail inventory method reduces inventory to market, let's say a retailer has a total inventory worth $10,000 at retail value. Based on their cost-to-retail percentage of 60%, they can estimate that the cost of this inventory is$6,000. However, if the market value of this inventory drops to $8,000 due to a decrease in demand or an increase in competition, the retailer would need to adjust the estimated cost of inventory to$4,800 (60% of \$8,000), which is the lower of the two values. This ultimately brings their inventory value closer to its market value and allows them to make more informed decisions in terms of pricing and inventory management.