P7-6 Reporting the Statement of Earnings and Cash Flow Effects of Lower of Cost and Net Realizable Value L07-5 Smart Company prepared its annual financial statements dated December 31, 2017. The company applies the FIFO inventory costing method; however, the company neglected to apply the LC&NRV valuation to the ending inventory. The preliminary 2017 statement of earnings follows: $ 281,000 $ 31,100 185,000 Sales revenue Cost of sales Beginning inventory Purchases Cost of goods available for sale Ending inventory (FIFO cost) Cost of sales 216,100 48,144 167,956 113,044 62,100 Gross profit Operating expenses Pretax earnings Income tax expense (30%) Net earnings 50,944 15,283 $ 35,661 Assume that you have been asked to restate the 2017 financial statements to incorporate the LC&NRV inventory valuation rule. You have developed the following data relating to the ending inventory at December 31, 2017: Net Realizable Acquisition Cost Value Item Quantity Unit Total A 3,060 $3.10 $ 9,486 $4.10 B 1,510 5.10 7,701 3.60 7,110 1.60 11,376 3.60 3,210 6.10 19,581 4.10 $48,144 Required: 1. Restate the statement of earnings to reflect the valuation of the ending inventory on December 31, 2017, at the LC&NRV. Apply the LC&NRV rule on an item-by-item basis SMART COMPANY Statement of Earnings (LCM basis) For the Year Ended December 31, 2017 Sales revenue Cost of sales Beginning inventory 31,100 Purchases 185,000 $ 281,000 $ 216,100 281,000 Cost of goods available for sale Ending inventory Cost of sales Gross profit Operating expense Pretax earnings Income tax expense Net earnings 281,000 A 281,000 2. Compare and explain the LC&NRV effect on each amount that was changed in part 1. (Negative answers should be indicated by a minus sign.) Amount of Change Item Changed Ending inventory Cost of sales Gross profit Pretax earnings Income tax expense Net earnings Effect Decreased Increased Decreased Decreased Decreased Decreased