Smart Company prepared its annual financial statements datedDecember 31. The company reported its inventory using the FIFOinventory costing method and failed to evaluate its net realizablevalue at December 31. The preliminary income statement follows:Sales Revenue $ 302,000 Cost of Goods Sold Beginning Inventory $41,000 Purchases 204,000 Goods Available for Sale 245,000 EndingInventory 95,400 Cost of Goods Sold 149,600 Gross Profit 152,400Operating Expenses 72,000 Income from Operations 80,400 Income TaxExpense (30%) 24,120 Net Income $ 56,280 Assume you have been askedto restate the financial statements to incorporate LCM/NRV. Youhave developed the following data relating to the ending inventory:Item Quantity Purchase Cost Net Realizable Value per Unit Per UnitTotal A 3,000 $ 5 $ 15,000 $ 6 B 2,000 8 16,000 6 C 8,100 4 32,4006 D 3,200 10 32,000 7 $ 95,400 TIP: Inventory write-downs do notaffect the cost of goods available for sale. Instead, the effect ofthe write-down is to reduce ending inventory, which increases Costof Goods Sold and then affects other amounts in the incomestatement.
