Jim Wong has been a public accountant for the past 20 years and is now a partner in a prominent accounting firm based in Truro, Nova Scotia. Recently, he was approached by the local chamber of commerce to be a guest speaker at its monthly meeting. Since many members of the chamber are small to midsized retailers, Jim decided to prepare a talk on determining inventory values and cost flow assumptions.
It is now Friday afternoon and Jim has just returned to his office following the presentation to the chamber. He is surprised to see messages from two clients who were at the meeting. The first message is from Bryan Cartel, who owns and operates the local Ford dealership. In addition to selling cars, the dealership also has a large service department and maintains an extensive inventory of parts and accessories.
The second caller is Jenny Mead, who manages her family's grocery store. Jim returns the calls and discovers that both businesspeople want further advice on the best cost flow assumption to use in their respective inventory systems.
In particular, Jenny would like to know why her family is using the FIFO approach instead of moving average. From Jim's chamber presentation, she learned that moving average results in lower net income in times of rising prices, and since lower net income means less taxes, she is wondering why Jim has not previously recommended switching to moving average.
Required:
a. Determine which inventory cost flow assumption would best suit the needs of each client. Be prepared to support your recommendation.
b. Writing as Jim, draft a response to Jenny regarding her concerns about the use of moving average in her business. Do you think that the business should change to this method? Why or why not?