Reference no: EM132670926

Specialty coffee shops have been hit with major coffee price increases over the past few years. Since 1997, the cost of green beans has rise by more then 40%. Why are prices increasing? First, Colombia's Coffee Growers' Federation is holding back exports in order to increase prices. Other countries are expected to impose quotas in an attempt to drive up prices further. Also, drought followed by heavy rains in Brazil affected 25% of the world's supply. Colombia's supply is threatened by strikes at its docks. These combined forces are leading most analysts to predict that coffee prices will most likely remain high.

• An international chain of coffee shops began accounting for its coffee bean purchases using the moving average cost flow assumption. Analysts hypothesized that this move could help the chain better maintain its net income then use of LIFO cost flow assumption would.

Problem (a) Why do you think the chain uses a perpetual inventory system (moving average) rather then a periodic inventory system (weighted average)?

Problem (b) Explain why the chain moved to the average cost flow assumption. How can this assumption help it to "better maintain its net income"?