Question

Smart Company prepared its annual financial statements dated December 31. The company reported its inventory using the FIFO inventory costing method and failed to evaluate its net realizable value at December 31. The preliminary income statement follows: Sales Revenue $ 302,000 Cost of Goods Sold Beginning Inventory $ 41,000 Purchases 204,000 Goods Available for Sale 245,000 Ending Inventory 95,400 Cost of Goods Sold 149,600 Gross Profit 152,400 Operating Expenses 72,000 Income from Operations 80,400 Income Tax Expense (30%) 24,120 Net Income $ 56,280 Assume you have been asked to restate the financial statements to incorporate LCM/NRV. You have developed the following data relating to the ending inventory: Item Quantity Purchase Cost Net Realizable Value per Unit Per Unit Total A 3,000 $ 5 $ 15,000 $ 6 B 2,000 8 16,000 6 C 8,100 4 32,400 6 D 3,200 10 32,000 7 $ 95,400 TIP: Inventory write-downs do not affect the cost of goods available for sale. Instead, the effect of the write-down is to reduce ending inventory, which increases Cost of Goods Sold and then affects other amounts in the income statement.

Answer 1

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		Purchase Cost		Net Realizable Value
Item	Quantity	Per unit	Total	Per Unit	Total	LCM/NRV
A	3,000	$                5	$        15,000	$                6	$      18,000	$      15,000
B	2,000	$                8	$        16,000	$                6	$      12,000	$      12,000
C	8,100	$                4	$        32,400	$                6	$      48,600	$      32,400
D	3,200	$              10	$        32,000	$                7	$      22,400	$      22,400
			$        95,400		$ 1,01,000	$      81,800
Sales Revenue			$    3,02,000
Less: Cost of goods sold
Beginning Inventory		$      41,000
Add: Purchase		$ 2,04,000
Cost of goods available for sale		$ 2,45,000
Less: Ending Inventory		$    -81,800
Cost of goods sold			$   -1,63,200
Gross Margin			$    1,38,800
Less: Operating Expense			$      -72,000
Income from operation			$        66,800
Less: Income tax (30%)			$      -20,040
Net Income			$        46,760