Smart Company prepared its annual financial statements dated December 31, 2010. The company applies the FIFO inventory costing method; however, the company neglected to apply the LCNRV valuation to the ending inventory. The preliminary 2010 income statement follows:

Assume that you have been asked to restate the 2010 financial statements to incorporate the LCNRV inventory valuation rule. You have developed the following data relating to the ending inventory at December 31,2010 :

Required:
1. Restate the income statement to reflect the valuation of the ending inventory on December 31 , 2010, at the lower of cost and net realizable value. Apply the LCNRV rule on an item-by-item basis and show computations.
2. Compare and explain the LCNRV effect on each amount that was changed in (1).
3. What is the conceptual basis for applying LCNRV to merchandise inventories?
4. What effect (increase, decrease, no effect) did the LCNRV rule have on the cash flow for 2010? What will be the long-term effect on cash flow (increase, decrease, no effect)? Computations are not necessary.

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Sales revenue $280,000 Cost of sales Beginning inventory $3,000 Purchases 184,000 Cost of goods available for sale 215,000 Ending inventory (FIFO cost) 46,500 Cost of sales 168,500 Gross profit Operating expenses Pretax profit Profit 111,500 62,000 49,500 Income tax expense (30%) 14,850 $ 34,650