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 $ 302,000 Cost of Goods Sold Beginning Inventory $ 41,000 Purchases 204,000 Goods Available for Sale 245,000 Ending Inventory 95,400 Cost of Goods Sold 149,600 Gross Profit 152,400 Operating Expenses 72,000 Income from Operations 80,400 Income Tax Expense (30%) 24,120 Net Income $ 56,280 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 3,000 $ 5 $ 15,000 $ 6 B 2,000 8 16,000 6 C 8,100 4 32,400 6 D 3,200 10 32,000 7 $ 95,400 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

Please find below tables as desired results: -

Calculation of Ending Inventory: -

Item	Per unit cost	Per unit NRV	Lower of Cost or NRV	Quantity	Value of Ending Inventory
	[A]	[B]	[C = lower of 'A' or 'B']	[D]	[E = C x D]
A	5	6	5	3,000	15,000
B	8	6	6	2,000	12,000
C	4	6	4	8,100	32,400
D	10	7	7	3,200	22,400
Ending Inventory as per LCM/NRV Method					81,800
Ending Inventory as per FIFO (as given in question)					95,400
Increase in Cost of Goods Sold by					13,600

Req. 1

Sales Revenue		302,000
Cost of Goods Sold:
Beginning Inventory	41,000
Purchases	204,000
Goods available for sale	245,000
Ending Inventory (calculated above)	81,800
Cost of Goods Sold		163,200
Gross Profits		138,800
Operating Expenses		72,000
Income from Operations		66,800
Income Tax expense (30%)		20,040
Net Income		46,760

Req. 2

Item Changed	FIFO	LCM/NRV Basis	Amount of Increase (Decrease)
Ending Inventory	95,400	81,800	(13,600)
Cost of Goods Sold	149,600	163,200	13,600
Gross Profits	152,400	138,800	(13,600)
Income from Operations	80,400	66,800	(13,600)
Income Tax Expense	24,120	20,040	(4,080)
Net Income	56,280	46,760	(9,520)