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 $ 318,000 Cost of Goods Sold Beginning Inventory $ 49,000 Purchases 220,000 Goods Available for Sale 269,000 Ending Inventory 86,500 Cost of Goods Sold 182,500 Gross Profit 135,500 Operating Expenses 80,000 Income from Operations 55,500 Income Tax Expense (30%) 16,650 Net Income $ 38,850 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 3,800 $ 6 $ 22,800 $ 7 B 1,600 10 16,000 8 C 8,900 3 26,700 5 D 3,500 6 21,000 3 $ 86,500 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. Required: Restate the income statement to reflect LCM/NRV valuation of the ending inventory. Apply LCM/NRV on an item-by-item basis. Compare and explain the LCM/NRV effect on each amount in the income statement that was changed in requirement 1.

Answer 1