Smith Company uses the LIFO retail inventory method for inventory costing. Smith Company has beginning inventory with a cost of $20,000 and a retail value of $40,000. During the year, the company purchases goods with a cost basis of $80,000 and a retail basis of $100,000. Sales are $60,000 at retail. Net markups are $5,000 and net markdowns are $5,000. Under the LIFO retail inventory method,

which cost-to-retail ratios are used to determine the cost of ending inventory?

A) beginning inventory 50%; new layer 80%
B) beginning inventory 50%; new layer 71.4%
C) beginning inventory 50%; new layer 50%
D) beginning inventory 50%; new layer 76.2%

Answer: A
Explanation: A)

Cost
Retail
Beginning inventory
$20,000
$40,000
Purchases
80,000
100,000
Net markups

5,000
Net markdowns
_____
(5,000)
Current year layer
80,000
100,000
Goods available for sale
100,000
140,000
Sales

(60,000)
Ending inventory at retail

$80,000

Ratio for beginning inventory: $20,000 / $40,000 = 50%
Ratio for new layer: $80,000 / $100,000 = 80%