Smart Company prepared its annual financial statements dated December 31, 2013. The company used the FIFO inventory costing method, but it failed to apply LCM to the ending inventory. The preliminary 2013 income statement follows:

Assume that you have been asked to restate the 2013 financial statements to incorporate LCM. You have developed the following data relating to the 2013 ending inventory:

Required:
1. Restate the income statement to reflect LCM valuation of the 2013 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 in requirement 1.
3. What is the conceptual basis for applying LCM to merchandise inventories?

Transcribed Image Text:

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