Big Boy Rekadz prepared its annual financial statements dated December 31 of the

Question

Big Boy Rekadz prepared its annual financial statements dated December 31 of the current year. The company applies the FIFO inventory costing method; however, the company neglected to apply LCM to the ending inventory. The preliminary current year income statement follows:

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

Acquisition
Cost

Sales revenue $ 289,000 Cost of goods sold Beginning inventory $ 33,900 Purchases 193,000 Goods available for sale 226,900 Ending inventory (FIFO cost) 61,584 Cost of goods sold 165,316 Gross profit 123,684 Operating expenses 62,900 Pretax income 60,784 Income tax expense (30%) 18,235 Net income $ 42,549

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

Acquisition
Cost

Net Realizable Value Item Quantity Unit Total (Market) A 3,140 $ 3.9 $ 12,246 $ 4.9 B 1,590 5.9 9,381 4.4 C 7,190 2.4 17,256 4.4 D 3,290 6.9 22,701 4.9 $ 61,584

Required 1. Prepare the income statement to reflect LCM valuation of the current year ending inventory. Apply LCM on an item-by-item basis (Round your answers to nearest dollar amount.) JAFFA COMPANY Income Statement (LCM basis) For the Year Ended December 31, Current Year Sales revenue Cost of goods sold Beginning inventory Purchases Goods available for sale Ending inventory Gross profit Operating expenses Pretax income ncome tax expense Net income

Explanation / Answer

By applying LCM : Item Quantity Acquisition cost Net realizable value Valuation based on LCM Cost of ending inventory A 3,140 3.9 4.9 3.9 12246 B 1,590 5.9 4.4 4.4 6996 C 7,190 2.4 4.4 2.4 17256 D 3,290 6.9 4.9 4.9 16121 52619 1) Income Statement : JAFFA COMPANY INCOME STATEMENT (LCM BASIS) For the Year Ended December 31, Current Year Sales Revenue 289000 Cost of goods sold Beginning inventory 33900 purchases 193000 Goods available for sale 226900 Ending inventory 52619 Cost of goods sold 174281 Gross profit 114719 operating expenses 62900 Pretax income 51819 Income tax expense 15546 Net income 36273 2) comparision of LCM effect on each amount that was changed in income statement : Item changed FIFO cost basis LCM Basis Amount of change (decrease) Ending inventory 61584 52619 -8965 Cost of goods sold 165316 174281 8965 Gross profit 123684 114719 -8965 pre tax income 60784 51819 -8965 income tax expense 18235 15546 -2689 Net income 42549 36273 -6276

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