Smart Company prepared its annual financial statements dated December 31. The company used the FIFO inventory costing method, but it failed to apply LCM to the ending inventory. The preliminary income statement follows:

Sales Revenue				$	312,000
Cost of Goods Sold
Beginning Inventory	$	46,000
Purchases		214,000
Goods Available for Sale		260,000
Ending Inventory (FIFO cost)		154,500
Cost of Goods Sold					105,500
Gross Profit					206,500
Operating Expenses					77,000
Income from Operations					129,500
Income Tax Expense (30%)					38,850
Net Income				$	90,650

Assume that you have been asked to restate the financial statements to incorporate LCM. You have developed the following data relating to the ending inventory:

				Purchase Cost						Market Value per Unit
Item	Quantity			Per Unit			Total
A		3,500		$	10		$	35,000		$	11
B		1,900			7			13,300			5
C		8,600			9			77,400			11
D		3,200			9			28,800			6
							$	154,500

TIP: Inventory write-downs do not affect the cost of goods available for sale. Instead, the effect of the write-down is to reduce ending inventory, which increases Cost of Goods Sold and then affects other amounts reported lower in the income statement.

Required:
1.	Restate the income statement to reflect LCM valuation of the ending inventory. Apply LCM on an item-by-item basis.

SMART COMPANY
Income Statement (LCM basis)
For the Year Ended December 31
Sales Revenue
Cost of Goods Sold:
Beginning Inventory
Purchases
Goods Available for Sale
Ending Inventory
Cost of Goods Sold
Gross Profit
Operating Expenses
Income from Operations
Income Tax Expense
Net Income

2.

Compare the LCM effect on each amount that was changed in requirement 1. (Decreases should be indicated by a minus sign.)

Item Changed	FIFO Cost Basis	LCM Basis	Amount of Increase (Decrease)
Ending Inventory
Cost of Goods Sold
Gross Profit
Income from Operations
Income Tax Expense
Net Income