BUSINESS CASE Julia has recently opened a dry fruits wholesale company dedicated to the sale of peanuts, almonds and pistachios

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BUSINESS CASE

Julia has recently opened a dry fruits wholesale company dedicated to the sale of peanuts, almonds and pistachios. The company’s name is “The Nuthouse”.

The Nuthouse was founded during 2020.

Julia’s passion, longevity and wealth of knowledge in the industry led to The Nuthouse expanding rapidly, creating a network of partners that spans farming operations in the key growing territories of South Africa, Australia, Kenya, Malawi, Zimbabwe, Mozambique and Brazil.

The processing factories surpass global food safety standards and are equipped with state of the art technology.

During February, its first month of activity, The Nuthouse made the following transactions:

Over and above these transactions, the company has had the following expenses:

The company’s accountant recommended that they 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 their financial situation.

 Create a network of students  that provide companies with a second opinion based on their technical know-how in accounting. This company is called “Global Accountants Inc.“ and was created to assist company’s in understanding and accounting for their business transactions accurately - the students are at the forefront of technical accounting concepts, especially after their recent studies in Inventory processes and valuation methods. Julia wanted a second opinion and has found your advisory services online. Relying on your accounting knowledge, Julia asks you the following questions:

QUESTION 1

Why in your opinion did Julia’s accountant recommend the average cost method?

1. Name and explain the main characteristics of the 3 methods of valuation of the inventory
2. Explain the consequences each valuation method may have on the valuation of the inventory in the above scenario and the determination of the net income in case of price fluctuation

QUESTION 2

Prepare an Income statement of the company at the end of February for each one of the products sold by Julia using the following methods of valuation of the inventory: You can ignore all tax consequences.

1. The average cost method
2. FIFO method and
3. LIFO method

Calculate the balances of the inventory at the end of the month for each valuation method and provide explanations of the calculations.  

QUESTION 3 (

In order to compare with the records made by her accountant, Julia 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. 

QUESTION 4 (

Julia’s accountant insisted that he should use a perpetual inventory system instead of a periodic inventory system and the average cost method for the valuation of inventory.

1. Do you agree with his advice (justify your answer)?
2. Would the balance of the inventory and the net income be the same at the end of the month?

QUESTION 5

Julia would like to know a forecast of the number of days to sell the inventory based on the results of the month of February. Please forecast the average number of days to sell inventory as well as how many times inventory is sold per year. Explain your calculation and describe the steps followed.

QUESTION 6

Julia expects that the prices of the merchandises (purchases) will dramatically decrease in the near future as a result of the COVID 19 crisis. Which method of valuation of the inventory would you thus recommend to Julia? Explain your answer.