Smart Company prepared its annual financial statements dated December 31, 2020. The company applies the FIFO inventory costing method; however, the company neglected to apply the LC&NRV valuation to the ending inventory. The preliminary 2020 statement of earnings follows:

Sales revenue				$	296,000
Cost of sales
Beginning inventory	$	32,600
Purchases		200,000
Cost of goods available for sale		232,600
Ending inventory (FIFO cost)		73,764
Cost of sales					158,836
Gross profit					137,164
Operating expenses					63,600
Pretax earnings					73,564
Income tax expense (35%)					25,747
Net earnings				$	47,817

Assume that you have been asked to restate the 2020 financial statements to incorporate the LC&NRV inventory valuation rule. You have developed the following data relating to the ending inventory at December 31, 2020:

				Acquisition Cost
Item	Quantity			Unit				Total		Net Realizable Value
A		3,210		$	4.60		$	14,766		$	5.60
B		1,660			6.60			10,956			5.10
C		7,260			3.10			22,506			5.10
D		3,360			7.60			25,536			5.60
							$	73,764

1. Restate the statement of earnings to reflect the valuation of the ending inventory on December 31, 2020, at the LC&NRV. Apply the LC&NRV rule on an item-by-item basis.

SMART COMPANY

Statement of Earnings (LC&NRV Basis)

For the Year Ended December 31, 2020

Cost of sales:
	0
		0
		0
		$0

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.)

Item Changed	Effect	Amount of Change

3. This part of the question is not part of your Connect assignment.

4-a. What effect (increase, decrease, no effect) did the LC&NRV rule have on the cash flow for 2020?

multiple choice 1

• No effect

• Decreased

• Increased

4-b. What will be the long-term effect on cash flow (increase, decrease, no effect)?

multiple choice 2

• Decreased

• Increased

• No effect