Retail Method

P 9. Fuentes Company operates a large discount store and uses the retail method to estimate the cost of ending inventory. Management suspects that in recent weeks there have been unusually heavy losses from shoplifting or employee pilfer- age. To estimate the amount of the loss, the company has taken a physical inven- tory and will compare the results with the estimated cost of inventory. Data from the accounting records of Fuentes Company are as follows:

At Cost At Retail

October 1 beginning inventory $51,488 $ 74,300

Purchases 71,733 108,500

Purchases returns and allowances (2,043) (3,200)

Freight-in 950

Sales 109,183

Sales returns and allowances (933)

October 31 physical inventory at retail 62,450

Required

1. Using the retail method, prepare a schedule to estimate the dollar amount of the stores month-end inventory at cost.

2. Use the stores cost to retail ratio to reduce the retail value of the physical inventory to cost.

3. Calculate the estimated amount of inventory shortage at cost and at retail.

4. Many retail chains use the retail method because it is efficient. Why do you

think using this method is an efficient way for these companies to operate?