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:

Sales Revenue		$ 290,000
Cost of Goods Sold
Beginning Inventory	$ 35,000
Purchases	192,000
Goods Available for Sale	227,000
Ending Inventory	117,500
Cost of Goods Sold		109,500
Gross Profit		180,500
Operating Expenses		66,000
Income from Operations		114,500
Income Tax Expense (30%)		34,350
Net Income		$ 80,150

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:

		Purchase Cost		Net Realizable
Item		Quantity	Per Unit		Total	Value per Unit
A	2,400	$ 5	$ 12,000	$ 6
B	2,000	9	18,000	7
C	7,500	7	52,500	9
D	3,500	10	35,000	7
			$ 117,500

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 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.