IIA-CIA-Part3 Exam Dumps | An entity uses the retail method of inventory estimation for interim reporting purposes. Management expects

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Question 22/152

An entity uses the retail method of inventory estimation for interim reporting purposes.
Management expects some normal shrinkage in the inventory because of theft. What effect will the failure to consider this shrinkage have on the computation of1) the cost retail ratio, and2) the estimated ending inventory at retail?

A. Option A

B. Option B

C. Option C

D. Option D

Correct Answer: B

The retail method of inventory estimation applies a cost-retail ratio to the ending inventory at retail to determine ending inventory at cost For example, a popular method calculates the ratio as goods available for sale at cost divided by goods available at retail, with markups but not markdowns included in the calculation of the retail amount. Normal inventory is subtracted from the retail amount of goods available because are not available. However, abnormal amounts of theft, etc., are removed from the cost and retail amounts. The reason for the difference in treatment is that normal but not abnormal inventory losses are anticipated and included in the selling retail value). Accordingly, failure to account for normal inventory shrinkage has no effect on the calculate cost-retail ratio but overstates ending inventory at retail.

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