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					$	160,000
Cost of Goods Sold
Beginning Inventory	$	20,000
Purchases		101,000
Goods Available for Sale		121,000
Ending Inventory		38,140
Cost of Goods Sold						82,860
Gross Profit						77,140
Operating Expenses						36,000
Income from Operations						41,140
Income Tax Expense (20%)						8,228
Net Income					$	32,912

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		2,000		$	4.00			$	8,000			$	5.00
B		800			5.80				4,640				2.90
C		4,500			3.00				13,500				1.45
D		2,000			6.00				12,000				4.00
								$	38,140

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

	Springer Anderson Gymnastics
	Income statement (LCM/NRV basis)
	For the year ended December 31
	Particulars		Amount ($)
	Sales revenue		160,000
	Cost of goods sold:
	Beginning inventory	20,000
	Purchases	101,000
	Goods Available for Sale	121,000
Note 1	Ending Inventory	24,845
	Cost of goods sold		96,155
	Gross profit		63,845
	Operating expenses		36,000
	Income from operations		27,845
	Income tax expenses (27,845*20%)		5,569
	Net income		22,276
	Comparison of LCM effect:-
	Item changed	LIFO Cost basis	LCM/NRV basis	Amount of change Increase (Decrease)
	Ending Inventory	38,140	24,845	(13,295)
	Cost of goods sold	82,860	96,155	13,295
	Gross profit	77,140	63,845	(13,295)
	Income from operations	41,140	27,845	(13,295)
	Income tax expenses	8,228	5,569	(2,659)
	Net income	32,912	22,276	(10,636)
	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	4.00	5.00	4.00	2,000	8,000
	B	5.80	2.90	2.90	800	2,320
	C	3.00	1.45	1.45	4,500	6,525
	D	6.00	4.00	4.00	2,000	8,000
			LCM Inventory Valuation			24,845