Question

. February 2:                                 KG       

.

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 Lovers Inc:

                                           KG               PRICE PER KG       AMOUNT

Pistachios:                      500 $22 $11,000

Almonds:                        1000                  $13                         $13,000

Peanuts:                         1500   $10 $15,000

February 12:                     

                                                KG                   PRICE PER KG AMOUNT

Purchase of Pistachios: 1500 $16 $24,000

Purchase of Almonds: 2000 $10 $20,000

February 13: Sale of peanuts to peanuts lovers Inc...:

                                           KG                    PRICE PER KG             AMOUNT

                                          3500 $10                               $35,000

February 14:  Purchase of Peanuts

                                         KG                       PRICE PER KG                  AMOUNT

                                        6000                      $6                                     $36,000

February 19:  Sold to several clients:

KG PRICE PER KG AMOUNT

  PISTACHIOS: 1000 $23                                  $23,000

  Almonds: 1500 $15                                  $22,500

  Peanuts: 3000 $11                                  $33,000

February 25: Purchased from various suppliers:

                                          KG                     PRICE PER KG                AMOUNT

Pistachios:                      1000                    $15                                $15,000

Almonds:                        1000                    $11                                $11,000

Peanuts:                         1000                     $6                                  $6,000

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

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

Business   Accounting   
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Homework Answers

Answer #1

FIFO method of inventory valuation is recommended when inventory prices are rising due to following reasons:

  • Inventory is valued at latest market price and hence inventory value represents the replacement cost in market
  • Cost of goods sold will be lower since earlier lower purchased lots is charged to income statement
  • Income reported under FIFO method will be higher compared to other methods of inventory valuation.
  • FIFO method is acceptable as per external reporting standards and is usually the best accepted method for inventory valuation.
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