multiplying the inventory at retail by the ratio of cost to

selling (retail) price for the goods available for sale, also

the estimate of cost of goods sold is calculated by

multiplying the net sales at retail by the ratio of cost to

retail price or by deducting the ending inventory at

estimated cost from the cost of goods available for sale,

these estimate appears as follows:

Exhibit 9

Cost Retail

Beginning inventory, Jan 1 L.E 19,400 L.E 36,000

Purchases in January (net) 42,600 64,000

Goods available for sale L.E 62,000 L.E 100,000

Ratio of cost to retail price : = 62%

(-)

Sales in January (net) 70,000

Ending inventory, January 31. at retail (-) 30,000

Ending inventory, January 31, at estimated cost (

L. E 30000 x 62%)

L.E 18,600

Cost of goods sold or ( 70000 x 62% ) 43,400

L.E. 62000

L.E. 10000

Chapter Four: Inventories and the cost of goods sold

194

In terms of the percent of cost to selling price, the

mix of the items in the ending inventory is assumed to be

the same as the entire stock of merchandise available for

sale. In Exhibit 9 for example, it is unlikely that the retail

price of every item was composed of exactly 62% cost and

38% gross profit. It is assumed, however, that the weighted

average of the cost percentages of the merchandise in the

inventory (L.E 30000) is the same as in the merchandise

available for sale (L.E 100000). When the inventory is

made up of different classes of merchandise with very

different gross profit rates, the cost percentages and the

inventory should be developed for each class of inventory.

One of the major advantages of the retail method is

that it provides inventory figures for use in preparing

monthly or quarterly statements. Department stores and

similar merchandisers usually determine gross profit and

operating, income each month but take a physical inventory

only once a year. A comparison of the estimated ending

inventory with the physical ending inventory, both at retail