Question

Springer Anderson Gymnastics prepared its annual financial statements dated December 31. The company reported its inventory using the LIFO inventory costing method but did not compare the cost of its ending inventory to its market value (replacement cost). The preliminary income statement follows:

Sales Revenue					$	122,000
Cost of Goods Sold
Beginning Inventory	$	10,500
Purchases		82,000
Goods Available for Sale		92,500
Ending Inventory		20,500
Cost of Goods Sold						72,000
Gross Profit						50,000
Operating Expenses						26,500
Income from Operations						23,500
Income Tax Expense (30%)						7,050
Net Income					$	16,450

Assume that you have been asked to restate the financial statements to incorporate the LCM/NRV rule. You have developed the following data relating to the ending inventory:

				Purchase Cost
Item	Quantity			Per Unit				Total				Replacement Cost per Unit
A		2,450		$	2.10			$	5,145			$	3.10
B		700			3.50				2,450				1.10
C		2,600			1.10				2,860				0.55
D		2,450			4.10				10,045				2.10
								$	20,500

Required:

1. 1-a. Restate the income statement to reflect LCM/NRV valuation of the ending inventory. Apply LCM/NRV on an item-by-item basis.
2. 1-b. Compare the LCM/NRV effect on each amount that was changed in the preliminary income statement in requirement 1.

Answer 1

1.

Computation of Ending Inventory on LCM/NRV Basis
Item	Quantity	Cost per unit	Replacement Cost per unit	LCM/NRV per unit	Ending Inventory on LCM basis (Quantity*LCM/NRV)
A	2450	$2.10	$3.10	$2.10	$5,145
B	700	$3.50	$1.10	$1.10	$770
C	2600	$1.10	$0.55	$0.55	$1,430
D	2450	$4.10	$2.10	$2.10	$5,145
Total					$12,490

Springer Anderson Gymnastics
Income Statement (LCM/NRV basis)
For the year ended December 31
Net Sales		$1,22,000
Cost of goods sold
Beginning Inventory	$10,500
Purchases	$82,000
Goods available for sale	$92,500
Ending Inventory	$12,490
Cost of Goods sold		$80,010
Gross profit		$41,990
Operating Expense		$26,500
Income from Operations		$15,490
Income Tax expense (30%)		$4,647
Net Income		$10,843

2.

Items Changed	LIFO Cost Basis	LCM/NRV Basis	Amount of Increase (Decrease)
Ending inventory	$20,500	$12,490	-$8,010
Cost of goods sold	$72,000	$80,010	$8,010
Gross Profit	$50,000	$41,990	-$8,010
Income from Operation	$23,500	$15,490	-$8,010
Income Tax expense	$7,050	$4,647	-$2,403
Net Income	$16,450	$10,843	-$5,607