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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