Question

Jaffa Company 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:
Required:
(a) Restate this income statement to reflect LCM valuation of the current year ending inventory. Apply LCM on an item-by-item basis and show computations.

Answer 1

The income statement to reflect LCM valuation of the current year ending inventory is

JAFFA COMPANY

Income Statement (LCM basis)

For the year ended December 31, the current year

   

Sales revnue   293000

Cost of goods sold    

  Beginning inventory 34300  

  Purchases  197000  

  Goods available for sale 231300  

  Ending inventory 44021  

Cost of goods sold   187279

Gros profit   105721

Operating expenses   63300

Pre-tax income   42421

Income tax expense  (35%) 14847

Net income   27574

   

LCM means a lower cost or market value.            

Ending inventory has to be valued at a lower cost or market value        

This principle has to be applied to each item of inventory.          

                   

                   

 FIFO Market Value LCM Difference    

Item Units Price Value Units Price Value Value From FIFO    

A 3180 4.30 13674 3180 3.30 10494 10494 3180    

B 1630 3.80 6194 1630 5.30 8639 6194 0    

C 7230 3.80 27474 7230 1.80 13014 13014 14460    

D 3330 4.30 14319 3330 6.30 20979 14319 0    

Total     61661       44021 17640    

                   

To determine the beginning inventory cost at the start of an accounting period, add together the previous period's cost of goods sold with its ending inventory. From that sum, subtract the amount of inventory purchased during that period. The resulting number is the beginning inventory cost for the next accounting period.

The main function of inventory is to provide operations with an ongoing supply of materials. To achieve this function effectively, your business should strive to find a sweet spot between too much and too little, without ever running out of stock.

The basic formula for calculating ending inventory is: Beginning inventory + net purchases – COGS = ending inventory. Your beginning inventory is the last period's ending inventory. The net purchases are the items you've bought and added to your inventory count.

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