Applying the lower-of-cost-or-market rule to inventories [5 min]Naturally Good Foods repor...

Applying the lower-of-cost-or-market rule to inventories [5 min]

Naturally Good Foods reports inventory at the lower of average cost or market. Prior to releasing its March 2012 financial statements, Naturally’s preliminary income statement, before the year-end adjustments, appears as follows:

Naturally has determined that the replacement cost of ending inventory is $17,000. Cost is $18,000.

Requirements

1. Journalize the adjusting entry for inventory, if any is required.

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2. Prepare a revised income statement to show how Naturally Good Foods should report sales, cost of goods sold, and gross profit.