Question

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.

2: 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?

3:Jim expects that the prices of the merchandise 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.

(Note: Please answer all these 3 questions cleary)

Answer 1

1)
Under FIFO method, oldest good sold out first and inventory in hand with latest purchased item . So
in case of rising price scenario, Cost of goods sold shall be lower and inventory should be higher valued.
in case of decreasing price scenario, Cost of goods sold shall be higher and inventory should be lower
valued.
Opposite the FIFO, LIFO method, newest good sold out first and inventory in hand with old purchased
item . So in case of rising price scenario, Cost of goods sold shall be higher and inventory should be lower
valued. in case of decreasing price scenario, Cost of goods sold shall be lower and inventory should be
higher valued.
Under Average costing method, it is assumed goods are sold all at the same time or continues.
So under avarage costing ststem used when there is no much deviation in various item. Cost of goods sold
and inventory shall be calculated based on average cost.
There are another valuation method, HIFO, highest in first out, where it is considered highest price goods
got sold first. So cost f goods sold to be higher and inventory relatively shall be lower.
So as Jim's accountant has used average method, so it can be assumed that there are not more variance in
cost of various product as purchased. So average cost method can be prefered.
Lets see effect of various method when price changed:
	FIFO	LIFO	Average	HIFO
If price rising
Inventory Value	Increased	Decreased	Average	Decreased
Net Income	Increased	Decreased	Average	Decreased
If price decreasing
Inventory Value	Decreased	Increased	Average	Decreased
Net Income	Decreased	Increased	Average	Decreased
2) Jim's accountant used perpetual inventory means continue accounting. But I am not aggred with
average costing system. As continue accounting is there, so it is better to use defferent method i.e.
FIFO instead average. It is assumed that Jim stock price is very varried in these days. So recommend to
use FIFO.
3. Use FIFO as having accounting in perpetual
two part solved.