Jaffa Company prepared its annual financial statements dated December 31, 2014. The company applies the FIFO inventory costing method; however, the company neglected to apply LCM to the ending inventory. The preliminary 2014 income statement follows:

Assume that you have been asked to restate the 2014 financial statements to incorporate LCM. You have developed the following data relating to the 2014 ending inventory:

Required:
1. Restate this income statement to reflect LCM valuation of the 2014 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 2014 cash flow? What will be the long-term effect on cashflow?

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Sales revenue $300,000 Cost of goods sold Beginning inventory Purchases 33,000 184,000 Goods available for sale 217,000 50,450 Ending inventory (FIFO cost) Cost of goods sold 166,550 133,450 62,000 71,450 21,435 50,015 Gross profit Pretax income Income tax expense (30%) Net income Current Replacement Unit Cost Market) Acquisition Cost Unit $3 Item Quantity 3,050 1,500 7,100 3,200 Total s 9,150 8,250 10,650 22,400 $50,450 $4 5.5 1.5 3.5 3.5