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					$	282,000
Cost of Goods Sold
Beginning Inventory	$	31,000
Purchases		184,000
Goods Available for Sale		215,000
Ending Inventory		55,900
Cost of Goods Sold						159,100
Gross Profit						122,900
Operating Expenses						62,000
Income from Operations						60,900
Income Tax Expense (30%)						18,270
Net Income					$	42,630

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:

Item	Quantity	Purchase Cost							Net Realizable Value per Unit
		Per Unit				Total
A	2,000	$	4			$	8,000			$	5
B	1,600		5				8,000				3
C	7,100		3				21,300				5
D	3,100		6				18,600				3
						$	55,900

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.

Complete this question by entering your answers in the tabs below.

• 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		$282,000
Cost of Goods Sold:
Beginning Inventory	$31,000
Purchases	184,000
Goods Available for Sale	215,000
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 1. (Decreases should be indicated by a minus sign.)

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