Hadera Company prepared its annual financial statements dated December 31 of the current year. The company applies the FIFO inventory costing method; however, the company neglected to apply lower of cost or net realizable value to the ending inventory. The preliminary current year income statement follows:

Assume that you have been asked to restate the current year financial statements to incorporate lower of cost or NRV. You have developed the following data relating to the current year ending inventory:

Required:
1. Restate the income statement to reflect lower of cost or net realizable value valuation of the current year ending inventory. Apply lower of cost or NRV on an item-by-item basis and show computations.
2. Compare and explain the lower of cost or net realizable value effect on each amount that was changed on the income statement in requirement (1).
3. What is the conceptual basis for applying lower of cost or net realizable value to merchandise inventories?
4. Thought question: What effect did lower of cost or net realizable value have on the current year cash flow? What will be the long-term effect on cash flow?

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Sales revenue Cost of goods sold: Beginning inventory Purchases Goods available for sale Ending inventory Cost of goods sold Gross profit Operating expenses Pretax income Income tax expense (25%) Net income $ 45,000 202,000 247,000 55,900 $500,000 191,100 308,900 174,000 134,900 33,725 $101,175