Question
In: Accounting
Jim has recently opened a dry fruits wholesale company dedicated to the sale of peanuts, almonds...
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:
February 2: Purchase of Pistachios: Purchase of Almonds:
Purchas of Peanuts:
February 3: Purchase of Pistachios: Purchase of Almonds:
Purchas of Peanuts:
February 6: Sold to several clients: Pistachios:
Almonds:
Peanuts:
February 6: Sold to Fruits Lovers Inc.:
Kg Price per Kg 2500 $12
4000 $7
6000 $5
1500 $14 2000 $8 2000 $6
2000 $22 2500 $13 3000 $9
Amount $30,000 $28,000 $30,000
$21,000 $16,000 $12,000
$44,000 $32,500 $27,000
Pistachios: 500 $22 Almonds: 1000 $13 Peanuts: 1500 $10
February 12 Purchase of Pistachios: 1500 $16 Purchase of
almonds: 2000 $10
February 13: Sale of peanuts to Peanuts Lovers Inc.: 3500 $10
February 14: Purchase of Peanuts 6000 $6
February 19: Sold to several clients:
Pistachios: 1000 $23 Almonds: 1500 $15 Peanuts: 3000 $11
February 25: Purchased from various suppliers:
Pistachios: 1000 $15 Almonds: 1000 $11 Peanuts: 1000 $6
Besides these transactions, the company has had the following
expenses: Salaries: $3650
Electricity bill: $360
Renting of equipment: $950
Rent of warehouse and office: $1.650 Miscellaneous:
$1.250
$11,000 $13,000 $15,000
$24,000 $20,000
$35,000 $36,000
$23,000 $22,500 $33,000
$15,000 $11,000 $6,000
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)
Solutions
Expert Solution
Part 2:
Income Statement based on FIFO (First in First Out)
| Pistachios | Almonds | Peanuts | Total | |
| Revenue from Sales | $ 78,000 | $ 68,000 | $ 110,000 | $ 256,000 |
| Cost of goods sold (FIFO) | $ 44,000 | $ 36,000 | $ 60,000 | $ 140,000 |
| Gross Profit | $ 34,000 | $ 32,000 | $ 50,000 | $ 116,000 |
| Less: Expenses | ||||
| Salaries | - | - | - | $ 3,650 |
| Electricity Bill | - | - | - | $ 360 |
| Renting of Equipment | - | - | - | $ 950 |
| Rent of Warehouse and Office | - | - | - | $ 1,650 |
| Miscellaneous | - | - | - | $ 1,250 |
| Total Expenses | - | - | - | $ 7,860 |
| Net Profit | $ 108,140 |
Under FIFO basis inventory which is purchased first is sold out first. Therefore, the total quantity of Pistachios sold is 3500 KG which is sold first from Pistachios purchased on 02 February (2500 KG) and then from 03 February (1000 KG). The remaining quantity and its equivalent cost form part of the Closing Inventory. The same is followed for the other two that is Almonds and Peanuts.
The cost of goods sold valuation using a FIFO basis method uses this technique " START FROM FIRST".
| Cost of Good Sold Statement (FIFO)-Pistachios | |||
| Quantity | Price per unit | Total COGS | |
| 02-Feb | 2,500 | $ 12 | $ 30,000 |
| 03-Feb | 1,000 | $ 14 | $ 14,000 |
| $ 44,000 |
| Cost of Good Sold Statement (FIFO)-Almonds | |||
| Quantity | Price per unit | Total COGS | |
| 02-Feb | 4,000 | $ 7 | $ 28,000 |
| 03-Feb | 1,000 | $ 8 | $ 8,000 |
| $ 36,000 |
| Cost of Good Sold Statement (FIFO)-Peanuts | |||
| Quantity | Price per unit | Total COGS | |
| 02-Feb | 6,000 | $ 5 | $ 30,000 |
| 03-Feb | 2,000 | $ 6 | $ 12,000 |
| 14-Feb | 3,000 | $ 6 | $ 18,000 |
| $ 60,000 |
Income Statement based on FIFO (Last in First Out)
| Pistachios | Almonds | Peanuts | Total | |
| Revenue from Sales | $ 78,000 | $ 68,000 | $ 110,000 | $ 256,000 |
| Cost of goods sold (FIFO) | $ 49,000 | $ 41,500 | $ 60,000 | $ 150,500 |
| Gross Profit | $ 29,000 | $ 26,500 | $ 50,000 | $ 105,500 |
| Less: Expenses | ||||
| Salaries | - | - | - | $ 3,650 |
| Electricity Bill | - | - | - | $ 360 |
| Renting of Equipment | - | - | - | $ 950 |
| Rent of Warehouse and Office | - | - | - | $ 1,650 |
| Miscellaneous | - | - | - | $ 1,250 |
| Total Expenses | - | - | - | $ 7,860 |
| Net Profit | $ 97,640 |
Under the LIFO basis of Inventory valuation, the inventory which is purchased at last as on the date of sale is sold out first. The total sales of Almond were 5000 KG. Therefore, for sale made on 06 February of 3500 KG adjusts first, purchase made on 03 February of 2000 KG ($16,000), then the remaining 1500 KF is adjusted from a purchase made on 02 February ($10500). The sales made on 19 February is adjusted from the Purchase made last that is on 12 February. The same is followed for the other two that are Pistachios and Peanuts.
The cost of goods sold valuation using a FIFO basis method uses this technique " START FROM LAST".
| Cost of Good Sold Statement (LIFO)-Pistachios | |||
| Quantity | Price per unit | Total COGS | |
| 03-Feb | 1,500 | $ 14 | $ 21,000 |
| 02-Feb | 1,000 | $ 12 | $ 12,000 |
| 12-Feb | 1,000 | $ 16 | $ 16,000 |
| $ 49,000 |
| Cost of Good Sold Statement (LIFO)-Almonds | |||
| Quantity | Price per unit | Total COGS | |
| 03-Feb | 2,000 | $ 8 | $ 16,000 |
| 02-Feb | 1,500 | $ 7 | $ 10,500 |
| 12-Feb | 1,500 | $ 10 | $ 15,000 |
| $ 41,500 |
| Cost of Good Sold Statement (LIFO)-Peanuts | |||
| Quantity | Price per unit | Total COGS | |
| 03-Feb | 2,000 | $ 6 | $ 12,000 |
| 02-Feb | 2,500 | $ 5 | $ 12,500 |
| 02-Feb | 3,500 | $ 5 | $ 17,500 |
| 14-Feb | 3,000 | $ 6 | $ 18,000 |
| $ 60,000 |
Income Statement based on FIFO (Average Cost)
| Pistachios | Almonds | Peanuts | Total | |
| Revenue from Sales | $ 78,000 | $ 68,000 | $ 110,000 | $ 256,000 |
| Cost of goods sold (FIFO) | $ 48,462 | $ 41,667 | $ 61,600 | $ 151,729 |
| Gross Profit | $ 29,538 | $ 26,333 | $ 48,400 | $ 104,271 |
| Less: Expenses | ||||
| Salaries | - | - | - | $ 3,650 |
| Electricity Bill | - | - | - | $ 360 |
| Renting of Equipment | - | - | - | $ 950 |
| Rent of Warehouse and Office | - | - | - | $ 1,650 |
| Miscellaneous | - | - | - | $ 1,250 |
| Total Expenses | - | - | - | $ 7,860 |
| Net Profit | $ 96,411 |
Under the Average Cost method of Inventory Valuation, Cost of Goods sold is determined by computing an average value that is,
Cost of Goods Sold of Peanuts
The same is followed for the other two that is Pistachios and Almonds.
Working Note:
Part 3:
The Journal entry for Purchases and Sales would be the same for each of the 3 methods which are as follows:
| Date | Account Titles and Explanation | Debit | Credit |
| $ | $ | ||
| 02-Feb | Purchase of Pistachios | 30,000 | |
| Purchase of Almonds | 28,000 | ||
| Purchase of Peanuts | 30,000 | ||
| Cash | 88,000 | ||
| To record the purchase of dry fruits | |||
| 03-Feb | Purchase of Pistachios | 21,000 | |
| Purchase of Almonds | 16,000 | ||
| Purchase of Peanuts | 12,000 | ||
| Cash | 49,000 | ||
| To record the purchase of dry fruits | |||
 ekkarill92 answered 1 year agoRelated SolutionsJim has recently opened a dry fruits wholesale company dedicated to the sale of peanuts, almonds...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:
February
2: KG PRICE
PER
KG AMOUNT
Purchase of Pistachios:
2500 $12 $30,000
Purchase of Almonds 4000
$7 $28,000
Purchase of Peanuts 6000 $5 $30,000
February
3: KG PRICE
PER
KG AMOUNT
Purchase of
Pistachios: 1500 $14 $21,000
Purchase of
Almonds: 2000 $8 $16,000
Purchas of
Peanuts: 2000 $6 $12,000
February 6: Sold to several
clients:
KG PRICE
PER
KG AMOUNT
Pistachios: 2000 $22 $44,000
Almonds: 2500 $13 $32,500
Peanuts: 3000 $9 $27,000
February 6: Sold to Fruits...
Jim has recently opened a dry fruits wholesale company dedicated to the sale of peanuts, almonds...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...
Jim has recently opened a dry fruits wholesale company dedicated to the sale of peanuts, almonds...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:
February
2: KG PRICE
PER
KG AMOUNT
Purchase of Pistachios:
2500 $12 $30,000
Purchase of Almonds 4000
$7 $28,000
Purchase of Peanuts 6000 $5 $30,000
February
3: KG PRICE
PER
KG AMOUNT
Purchase of
Pistachios: 1500 $14 $21,000
Purchase of
Almonds: 2000 $8 $16,000
Purchas of
Peanuts: 2000 $6 $12,000
February 6: Sold to several
clients:
KG PRICE
PER
KG AMOUNT
Pistachios: 2000 $22 $44,000
Almonds: 2500 $13 $32,500
Peanuts: 3000 $9 $27,000
February 6: Sold to Fruits...
Jim Sandalwood has recently opened The Sandal Hut in Brisbane, Australia, a store that specializes in...
Jim Sandalwood has recently opened The Sandal Hut in Brisbane,
Australia, a store that specializes in fashionable sandals. Jim has
just received a degree in business and he is anxious to apply the
principles he has learned to his business. In time, he hopes to
open a chain of sandal shops. As a first step, he has prepared the
following analysis for his new store:
Sales price per pair of sandals
$
50.00
Variable expenses per pair of sandals...
DURAPLAST Company Ltd., opened its doors in 1979 as a wholesale supplier of plumbing equipment, tools,...
DURAPLAST Company Ltd., opened its doors in 1979 as a wholesale
supplier of plumbing equipment, tools, and parts to hardware
stores, home-improvement centers, and professional plumbers in the
Accra-Tema Metropolitan area. Over the years they have expanded
their operations to serve customers across the nation and now
employ over 200 people as technical representatives, buyers,
warehouse workers, and sales and office staff. Most recently
DURAPLAST has experienced fierce competition from the large online
discount stores such as Qualiplast and Interplast....
DURAPLAST Company Ltd., opened its doors in 1979 as a wholesale supplier of plumbing equipment, tools,...
DURAPLAST Company Ltd., opened its doors in 1979 as a
wholesale supplier of plumbing equipment, tools, and parts to
hardware stores, home-improvement centers, and professional
plumbers in the Accra-Tema Metropolitan area. Over the years they
have expanded their operations to serve customers across the nation
and now employ over 200 people as technical representatives,
buyers, warehouse workers, and sales and office staff. Most
recently DURAPLAST has experienced fierce competition from the
large online discount stores such as Qualiplast and Interplast....
Jim Coleman, Jr. was appointed the manager of Maris Properties, a recently formed company that manages...Jim Coleman, Jr. was
appointed the manager of Maris Properties, a recently formed
company that manages residential rental properties. Linda Grider is
the accountant. She prepared a chart of accounts based on an
analysis of the expenditures of the company. Two of the largest
expense categories are Travel and Entertainment. Mr. Coleman
believes that it is important to maintain a presence in the social
life of the city. In this, he sharply differs from his father, Jim
Coleman, Sr. The...
Jim Coleman, Jr. was appointed the manager of Maris Properties, a recently formed company that manages...Jim Coleman, Jr. was
appointed the manager of Maris Properties, a recently formed
company that manages residential rental properties. Linda Grider is
the accountant. She prepared a chart of accounts based on an
analysis of the expenditures of the company. Two of the largest
expense categories are Travel and Entertainment. Mr. Coleman
believes that it is important to maintain a presence in the social
life of the city. In this, he sharply differs from his father, Jim
Coleman, Sr. The...
Jim Coleman, was appointed the manager of Maris Properties, a recently formed company that manages residential...Jim Coleman, was appointed the manager of Maris Properties, a
recently formed company that manages residential rental properties.
Linda Grider is the accountant. She prepared a chart of accounts
based on an analysis of the expenditures of the company. One of the
largest expense categories is Travel and Entertainment. Mr. Coleman
believes that it is important to maintain a presence in the social
life of the city. In this, he sharply differs from his father,
Randall Coleman. Randall has set...
Jim Coleman, was appointed the manager of Maris Properties, a recently formed company that manages residential...Jim Coleman, was appointed the manager of Maris Properties, a
recently formed company that manages residential rental properties.
Linda Grider is the accountant. She prepared a chart of accounts
based on an analysis of the expenditures of the company. One of the
largest expense categories is Travel and Entertainment. Mr. Coleman
believes that it is important to maintain a presence in the social
life of the city. In this, he sharply differs from his father,
Randall Coleman. Randall has set...
ADVERTISEMENT
ADVERTISEMENT
Latest Questions
ADVERTISEMENT
|