Halm Skidoos Limited, a private company that began operations in 2010, always values its inventories at their current net realizable value. The company uses ASPE. Its annual inventory figure is arrived at by taking a physical count and then pricing each item in the physical inventory at current resale prices. The condensed income statements for the company's past four years are as follows:

Instructions
(a) Comment on the procedures that Hahn uses for valuing inventories.
(b) Prepare corrected condensed income statements using an acceptable method of inventory valuation, assuming that the inventory at cost and as determined by the corporation (using net realizable value) at the end of each of the four years is as follows:

(c) Compare the trend in income for the four years using the corporation's approach to valuing ending inventory and using a method that is acceptable under GAAP.
(d) Calculate the cumulative effect of the difference in the valuation of inventory on the ending balance of retained earnings from 2010 through 2013.
(e) Comment on the differences that you observe after making the corrections to the inventory valuation over the four years.

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Sales Cost of goods sold Gross profit Operating expenses Income before taxes 2010 $850,000 560,000 290,000 90,000 $100,000 2011 $880,000 590,000 290,000 180,000 $110,000 2012 $950,000 630,000 320,000 200,000 $120,000 2013 $990,000 650,000 340,000 210,000 $130,000 4 At Cost $150,000 147,000 178,000 175,000 Net Realizable Value Year 2010 2011 2012 2013 $160,000 160,000 170,000 189,000