Question

Jim has recently opened a dry fruits wholesale company dedicated to the sale of peanuts, almonds and pistachios.
During its first month of activity, the company has made the following transactions:

Kg Price per Kg Amount
February 2: Purchase of Pistachios: 2500 $11 $27,500
Purchase of Almonds: 4000 $6 $24,000
Purchase of Peanuts: 6000 $4 $24,000
February 3: Purchase of Pistachios: 1500 $13 $19,500
Purchase of Almonds: 2000 $7 $14,000
Purchas of Peanuts: 2000 $5 $10,000
February 6: Sold to several clients:
Pistachios: 2000 $21 $42,000
Almonds: 2500 $12 $30,000
Peanuts: 3000 $8 $24,000
February 6: Sold to Fruits Lovers Inc.:

Pistachios: 500 $21 $10,500
Almonds: 1000 $12 $12,000
Peanuts: 1500 $9 $13,500
February 12 Purchase of Pistachios: 1500 $15 $22,500
Purchase of almonds: 2000 $9 $18,000
February 13: Sale of peanuts to Peanuts Lovers Inc.: 3500 $9 $31,500
February 14: Purchase of Peanuts 6000 $5 $30,000
February 19: Sold to several clients:
Pistachios: 1000 $22 $22,000
Almonds: 1500 $14 $21,000
Peanuts: 3000 $10 $30,000
February 25: Purchased from various suppliers:
Pistachios: 1000 $14 $14,000
Almonds: 1000 $10 $10,000
Peanuts: 1000 $5 $5,000
Besides these transactions, the company has had the following expenses:
Salaries: $3600
Electricity bill: $350
Renting of equipment: $900
Rent of warehouse and office: $1.600
Miscellaneous: $1.300
Jim’s accountant recommended that he should use the average cost method in order to determine the cost of the inventory sold but he is not sure about the
consequences it may have on his financial situation.
Relying on your accounting knowledge, Jim asks you the following questions:

1: Why in your opinion did Jim’s accountant recommend the average cost method and what difference is there with the three other methods? Explain the main
characteristics of each method of valuation of the inventory and the consequences they may have on the valuation of the inventory and determination of the net
income in case of price fluctuation. (20 points)
2: Prepare an Income statement of the company at the end of February using as method of valuation of the inventory the average cost method, FIFO and LIFO for
each one of the products sold by Jim, and calculate the balance of the inventory at the end of the month. Explain the calculations. (40 points: 30 points for the
calculation and 10 for explanations)
3: In order to compare with the records made by his accountant, Jim asks you to prepare the different journal entries for the purchases and sales mentioned above
for each one of the 3 different methods used above. (15 points)
4: Jim’s accountant insisted that he should use a perpetual inventory system instead of a periodic inventory system and the average cost method for valuating the
inventory. Do you agree with this advice (justify your answer)? Would the balance of the inventory at the end of the month be the same? And the net income? (15
points)
5: Jim would like to know a forecast of the number of days to sell the inventory based on the results of the month of February. Explain your calculation and the
steps followed. (10 points: 5 for calculation and 5 for explanation)
6. Jim expects that the prices of the merchandises will dramatically decrease in the next future as a result of the Covid 19 crisis. Which method of valuation of the
inventory would you thus recommend to Jim? Explain your answer. (5 points)

Answer 1

2.