P7-6 (Algo) Evaluating the Income Statement and Cash Flow Effects of Lower of Cost or Net Realizable Value LO7-4 [The following information applies to the questions displayed below.] Jaffa 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: Sales revenue Cost of goods sold Beginning inventory Purchases Goods available for sale Ending inventory (FIFO cost) Cost of goods sold Gross profit Operating expenses Pretax income Income tax expense (30%) Net income $286,000 $ 33,600 190,000 223,600 56,484 167,116 118,884 62,600 56,284 16,885 $ 39,399 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: Acquisition Cost Item Quantity Unit Total Net Realizable Value Per Unit A 3,110 $3.60 $ 11,196 $ 4.60 B 1,560 5.60 8,736 4.10 C 7,160 2.10 15,036 3,260 6.60 21,516 4.10 4.60 $ 56,484 P7-6 Part 2 2. Compare the lower of cost or net realizable value effect on each amount that was changed on the income statement in requirement (1). (Decreases should be indicated by a minus sign.)(Round your answers to nearest dollar amount.) Answer is complete but not entirely correct. Amount of Change (Decrease) Lower of FIFO Cost Item Changed Cost or Basis NRV Ending inventory $ 56,484 $ 47,624 $ (8,860) Cost of goods sold 167,116 175,976 8,860 Gross profit 118,884 110,024 (8,860) Pretax income Income tax expense Net income 56,284 46,424 X (9,860) 16,885 14,227 (2,658) 39,399 33,197 (6,202)