Smart Company prepared its annual financial statements dated December 31. The company used the FIFO inventory costing method, but it failed to apply LCM to the ending inventory. The preliminary income statement follows: Sales Revenue $ 316,000 Cost of Goods Sold Beginning Inventory $ 48,000 Purchases 218,000 Goods Available for Sale 266,000 Ending Inventory (FIFO cost) 92,500 Cost of Goods Sold 173,500 Gross Profit 142,500 Operating Expenses 79,000 Income from Operations 63,500 Income Tax Expense (30%) 19,050 Net Income $ 44,450 Assume that you have been asked to restate the financial statements to incorporate LCM. You have developed the following data relating to the ending inventory: Purchase Cost Market Value per Unit Item Quantity Per Unit Total A 3,700 $ 12 $ 44,400 $ 13 B 1,500 9 13,500 7 C 8,800 2 17,600 4 D 3,400 5 17,000 2 $ 92,500 TIP: 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.
Required:
1. Restate the income statement to reflect LCM valuation of the ending inventory. Apply LCM on an item-by-item basis.
2. Compare the LCM effect on each amount that was changed in requirement 1. (Decreases should be indicated by a minus sign.)