Lesson 12: Discussion Forum

Hudson River Company, which is both a wholesaler and a retailer, purchases its inventories from various suppliers.

Additional facts for Hudsons wholesale operations are as follows:

1. Hudson incurs substantial warehousing costs.
2. Hudson values inventory at the lower of cost and net realizable value. Net realizable value is below cost of the inventories.

Additional facts for Hudsons retail operations are as follows:

1. Hudson determines the estimated cost of its ending inventories held for sale at retail using the retail inventory method, which approximates lower of cost and net realizable value.
2. Hudson incurs substantial freight-in costs.
3. Hudson has net markups and net markdowns.

1. Theoretically, how should Hudson account for the warehousing costs related to its wholesale inventories? Why?
2. In general, why is inventory valued at the lower of cost and net realizable value? At which amount should Hudsons wholesale inventories be reported on the balance sheet?
3. In the calculation of the cost-to-retail percentage used to determine the estimated cost of its ending retail inventories, how should Hudson treat
   1. freight-in costs,
   2. net markups, and
   3. net markdowns?
4. Why does Hudsons retail inventory method approximate lower of average cost and net realizable value?