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					$	126,000
Cost of Goods Sold
Beginning Inventory	$	11,500
Purchases		84,000
Goods Available for Sale		95,500
Ending Inventory		21,400
Cost of Goods Sold						74,100
Gross Profit						51,900
Operating Expenses						27,500
Income from Operations						24,400
Income Tax Expense (40%)						9,760
Net Income					$	14,640

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		2,350		$	2.30			$	5,405			$	3.30
B		750			3.00				2,250				1.40
C		2,800			1.30				3,640				0.70
D		2,350			4.30				10,105				2.30
								$	21,400

Required:

Restate the income statement to reflect LCM/NRV valuation of the ending inventory. Apply LCM/NRV on an item-by-item basis.

Compare the LCM/NRV effect on each amount that was changed in the preliminary income statement in requirement 1.

Answer 1

Part -(1)	Springer Anderson Gymnastics
	Income statement (LCM/NRV basis)
	For the year ended December 31
	Particulars		Amount ($)
	Sales revenue		126,000
	Cost of goods sold:
	Beginning inventory	11,500
	Purchases	84,000
	Goods Available for Sale	95,500
Note 1	Ending Inventory	13,820
	Cost of goods sold		81,680
	Gross profit		44,320
	Operating expenses		27,500
	Income from operations		16,820
	Income tax expenses (16,820*40%)		6,728
	Net income		10,092
Part -(2)	Comparison of LCM effect:-
	Item changed	LIFO Cost basis	LCM/NRV basis	Amount of change Increase (Decrease)
	Ending Inventory	21,400	13,820	(7,580)
	Cost of goods sold	74,100	81,680	7,580
	Gross profit	51,900	44,320	(7,580)
	Income from operations	24,400	16,820	(7,580)
	Income tax expenses	9,760	6,728	(3,032)
	Net income	14,640	10,092	(4,548)
	We can see that Ending Inventory, Cost of goods sold, Gross profit, Income from operations, Income tax expenses and net income each got changed due to the change in method of valuation of inventory.
Note 1	Computation of ending inventory on LCM basis:
	Item	Original Unit cost	Replacement cost per unit	LCM per unit	Quantity	LCM valuation
	A	2.30	3.30	2.30	2,350	5,405
	B	3.00	1.40	1.40	750	1,050
	C	1.30	0.70	0.70	2,800	1,960
	D	4.30	2.30	2.30	2,350	5,405
			LCM Inventory Valuation			13,820