L. Smart Company prepared its annual financial statements dated December 31, 2014. The company used the FIFO inventory costing method, but it failed to apply the LC&NRV to the ending inventory. The preliminary 2014 income statement follows:

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 reported lower in the income statement.
Assume that you have been asked to restate the 2014 financial statements to incorporate the LC&NRV. You have developed the following data relating to the 2014 ending inventory:

Required:
1. Restate the income statement to reflect the LC&NRV rule of the 2014 ending inventory. Apply the lower of cost and net realizable value on an item-by-item basis and show computations.
Net Income equals $27,300.
2. Compare and explain the lower of cost and net realizable value effect on each amount that was changed in requirement 1.
Net Income decreases by $8,400.
3. What is the conceptual basis for applying the lower of cost and net realizable value to merchandise inventory?

Transcribed Image Text:

Sales Rovenue $280,000 Cost of Goods Sold $ 30,000 182,000 Beginning Inventory Purchases Goods Available for Sale Ending Inventory (FIFO cost) 212,000 44,000 Cost of Goods Sold 168,000 Gross Profit 112,000 Operating Expenses Income from Operations Income Tax Expense (30%) 61,000 51,000 15,300 $ 35,700 Net Income Current Replacement Cost per Unit (Net Realizable Value) Purchase Cost Per Unit Total Item Quantity 3,000 1,500 7,000 3,000 $ 9,000 6,000 14,000 15,000 $44,000 $3 4 $4 2 2