Smart Company prepared its annual financial statements dated December 31, 2010. The company applies the FIFO inventory costing method; however, the company neglected to apply LCM to the ending inventory. The preliminary 2010 income statement follows:

Assume that you have been asked to restate the 2010 financial statements to incorporate LCM. You have developed the following data relating to the 2010 ending inventory:

Required:
1. Restate this income statement to reflect LCM valuation of the 2010 ending inventory. Apply LCM on an item-by-item basis and show computations.
2. Compare and explain the LCM effect on each amount that was changed on the income statement in requirement 1.
3. What is the conceptual basis for applying LCM to merchandise inventories?
4. Thought question: What effect did LCM have on the 2010 cash flow? What will be the long-term effect on cashflow?

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$280,000 Sales revenue Cost of goods sold Beginning inventory Purchases 31,000 184,000 215,000 46.500 Goods available for sale Ending inventory (FIFO cost) Cost of goods sold 168,500 111,500 62,000 49,500 14,850 34.650 Gross profit Operating expenses Pretax income Income tax expense (30%) Net income Acquisition Cost Current Replacement Unit Cost Total Ite Quantity Unit 3,050 1,500 7,100 3,200 Market S3 9,150 7,500 10,650 19,200 $46.500 S4 3.5 3.5 6