Between The Ears (BTE.com) is a popular Internet music store. During the current year, the company’s cost of goods available for sale amounted to $462,000. The retail sales value of this merchandise amounted to $840,000. Sales for the year were $744,000.

Instructions

a. Using the retail method, estimate (1) the cost of goods sold during the year and (2) the inventory at the end of the year.

b. At year-end, BTE.com takes a physical inventory. The general manager walks through the warehouse counting each type of product and reading its retail price into a tape recorder.

From the recorded information, another employee prepares a schedule listing the entire ending inventory at retail sales prices. The schedule prepared for the current year reports ending inventory at $84,480 at retail sales prices.

1. Use the cost ratio computed in part a to reduce the inventory counted by the general manager from its retail value to an estimate of its cost.

2. Determine the estimated shrinkage losses (measured at cost) incurred by BTE.com during the year.

3. Compute BTE.com’s gross profit for the year. (Include inventory shrinkage losses in the cost of goods sold.)

c. What controls might BTE.com implement to reduce inventory shrinkage?