Smart Company prepared its annual financial statements dated December 31. The company reported its inventory using the FIFO inventory costing method and failed to evaluate its net realizable value at December 31. The preliminary income statement follows:

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

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 in the income statement.

Required:

1. Restate the income statement to reflect LCM/NRV valuation of the ending inventory. Apply LCM/NRV on an item-by-item basis.
2. Compare and explain the LCM/NRV effect on each amount in the income statement that was changed in requirement 1.

Smart Company prepared its annual financial statements dated December 31. The company reported its inventory using the FIFO inventory costing method and failed to evaluate its net realizable value at December 31. The preliminary income statement follows $316,000 Sales Revenue Cost of Goods Sold Beginning Inventory Purchases $ 48,000 218,000 266,000 92.500 Goods Available for Sale Ending Inventory Cost of Goods Sold Gross Profit Operating Expenses Income from Operations Income Tax Expense (30%) Net Income 173,500 142,500 79,000 63,500 19,050 $ 44,450 Assume you have been asked to restate the financial statements to incorporate LCM/NRV. You have developed the following data relating to the ending inventory: Net Realizable Value per Unit $13 Purchase Cost Per Total $44,400 13,500 17,600 17.000 $92,500 Item Quantity Unit 3,700 1,500 8,800 3,400 $12 2 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 in the income statement. Required: 1. Restate the income statement to reflect LCM/NRV valuation of the ending inventory. Apply LCM/NRV on an item-by-item basis. 2. Compare and explain the LCM/NRV effect on each amount in the income statement that was changed in requirement 1. Required 1 Required 2 Restate the income statement to reflect LCM/NRV valuation of the ending inventory. Apply LCM/NRV on an item-by-item basis. SMART COMPANY Income Statement (LCM/NRV 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 Compare and explain the LCM/NRV effect on each amount in the income statement that was changed in requirement (Decreases should be indicated by a minus sign.) FIFO Cost Basis LCM/NRV Amount of Item Changed Increase Decrease Basis Ending Inventory Cost of Goods Sold Gross Profit Income from Operations Income Tax Expense Net Income