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

Sales revenue				$	291,000
Cost of sales
Beginning inventory	$	32,100
Purchases		195,000
Cost of goods available for sale		227,100
Ending inventory (FIFO cost)		65,024
Cost of sales					162,076
Gross profit					128,924
Operating expenses					63,100
Pretax earnings					65,824
Income tax expense (40%)					26,330
Net earnings				$	39,494

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

				Acquisition Cost
Item	Quantity	Unit			Total		Net Realizable Value
A		3,160		$	4.10		$	12,956		$	5.10
B		1,610			6.10			9,821			4.60
C		7,210			2.60			18,746			4.60
D		3,310			7.10			23,501			5.10
							$	65,024

Required:

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

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.)

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 the current year?

multiple choice 1

Increased

Decreased

No effect

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

multiple choice 2

No effect

Increased

Decreased