Halm Skidoos Limited, a private company that began operations in 2014, 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:

2014

2015

2016

2017

Sales

$850,000

$880,000

$950,000

$990,000

Cost of goods sold

560,000

590,000

630,000

650,000

Gross profit

290,000

290,000

320,000

340,000

Operating expenses

190,000

180,000

200,000

210,000

Income before taxes

$100,000

$110,000

$120,000

$130,000

Instructions

(a)Comment on the procedures that Halm 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:

Year

At Cost

Net Realizable Value

2014

$150,000

$160,000

2015

147,000

160,000

2016

178,000

170,000

2017

175,000

189,000

(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 2014 through 2017.

(e)Comment on the differences that you observe after making the corrections to the inventory valuation over the four years.