Question 1 (of 1) value 2.00 points Smart Company prepared its annual financial

Question

Question 1 (of 1) value 2.00 points Smart Company prepared its annual financial statements dated December 31. The company used the FIFO inventory costing method, but it failed to apply LCM statement follows: to the ending inventory. The preliminary income Sales Revenue Cost of Goods Sold $314,000 Beginning Inventory 47,000 216,000 Goods Available for Sale Ending Inventory (FIFO cost) 263,000 175,600 Cost of Goods Sold 87,400 Gross Profit 226,600 78,000 Income from Operations Income Tax Expense (30%) 148,600 44,580 Net Income $104,020 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 Value per $12 12 Item Quantity Per UnitTotaUnit A 3,600 $11 39,600 16,000 87,000 33,000 2,000 C 8,700 3,300 10 10 $175,600 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

Explanation / Answer

Smart Company Income Statement (LCM Basis) For the year ended December 31 Sales Revenue 314000 Cost of Goods Sold: Beginning Inventory 47000 Purchases 216000 Goods Available for Sale 263000 Ending Inventory 161700 Cost of Goods Sold 101300 Gross Profit 212700 Operating Expenses 78000 Income from Operations 134700 Income Tax Expense (134700*30%) 40410 Net Income 94290 Explanation Item Original Unit Cost Market Value Per Unit LCM per Unit Quantity LCM Valuation A 11 12 11 3600 39600 B 8 6 6 2000 12000 C 10 12 10 8700 87000 D 10 7 7 3300 23100 LCM Inventory Valuation 161700 Item Changed FIFO Cost Basis LCM Basis Amount of Increase/Decrease Ending Inventory 175600 94290 -81310 Cost Of goods Sold 87400 101300 13900 Gross Profit 226600 212700 -13900 Income from operations 148600 134700 -13900 Income Tax Expense 44580 40410 -4170 Net Income 104020 94290 -9730

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