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					$	316,000
Cost of Goods Sold
Beginning Inventory	$	48,000
Purchases		218,000
Goods Available for Sale		266,000
Ending Inventory		92,500
Cost of Goods Sold						173,500
Gross Profit						142,500
Operating Expenses						79,000
Income from Operations						63,500
Income Tax Expense (30%)						19,050
Net Income					$	44,450

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	3,700	$	12			$	44,400			$	13
B	1,500		9				13,500				7
C	8,800		2				17,600				4
D	3,400		5				17,000				2
						$	92,500

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:

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

Answer 1