Question

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
Purchase 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 $31,50

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

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)

Answer 1

Average cost method is one of the method of inventory valuation, it is ideal to apply this method where same goods are purchased at different times or where same goods can have different prices at different times. in the above question the company purchases 3 goods being Pistachios, Almonds and peanuts further these are purchased on different dates and that too at different prices therefore it is ideal condition to apply Average Cost Method. moreover, this method also captures in the variation of prices in the goods purchased.

Here we have also assumed that company sales only one type of Pistachios, Almonds and peanuts

Average Cost Method which is also known as weighted average cost method, in this method the company the value of closing inventory is calculated in the following manner:

Weighted Average Cost per Unit: =	Total value of purchases done in the period
Total Qty purchased

Another methods of inventory valuation are:

1. FIFO Method (first-in, first-out)

2. LIFO Method (last-in, first-out)

main characteristics of these methods are as follows:

Under FIFO method it is assumed that the inventory which is purchased first would be sold first therefore inventory left at the end would be from the last purchases made so closing inventory is valued at the price at which last purchases are made.

This method is ideal to be applied on the perishable goods.

Under LIFO it is assumed that the inventory which is purchased last would be sold first therefore inventory left at the end would be from the purchases made at the earliest date so closing inventory is the inventory left from earliest date and valued at the price at which earliest purchases were made (if value of opening stock per unit is available the closing inventory is values at that price also)

in inflation times we use

Consequences of method of inventory valuation is that it directly affects the reported profits of the company. Since closing stock comes on the credit side of profit and loss account of the company any changes in its value will affect the reported profits for example

now any change in the number at closing stock would affect the net profit.

now we see the consequenses in this question

Total sales:

Purchases details:

applying weighted average cost of inventory valuation:

applying LIFO and FIFO method of inventory valuation:

Income statement:

this income statemnet is just for understading of affect of value of stock. further from this we can clearly see the affect of closing stock value on net income of a company.

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