L. Smart Company prepared its annual financial statements dated December 31, 2014. The company used the FIFO
Question:
L. Smart Company prepared its annual financial statements dated December 31, 2014. The company used the FIFO inventory costing method, but it failed to apply the LC&NRV to the ending inventory. The preliminary 2014 income statement follows:
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 reported lower in the income statement.
Assume that you have been asked to restate the 2014 financial statements to incorporate the LC&NRV. You have developed the following data relating to the 2014 ending inventory:
Required:
1. Restate the income statement to reflect the LC&NRV rule of the 2014 ending inventory. Apply the lower of cost and net realizable value on an item-by-item basis and show computations.
Net Income equals $27,300.
2. Compare and explain the lower of cost and net realizable value effect on each amount that was changed in requirement 1.
Net Income decreases by $8,400.
3. What is the conceptual basis for applying the lower of cost and net realizable value to merchandise inventory?
Financial statements are the standardized formats to present the financial information related to a business or an organization for its users. Financial statements contain the historical information as well as current period’s financial...
Step by Step Answer:
Fundamentals Of Financial Accounting
ISBN: 9780073527109
3rd Edition
Authors: Fred Phillips, Robert Libby, Patricia A Libby