Question

Mondetta Clothing prepared its annual financial statements dated December 31. The company used the FIFO inventory costing method, but it failed to apply LCM to the ending inventory. The preliminary income statement follows:

Net Sales $ 440,000

Cost of Goods Sold

Beginning Inventory $ 50,000

Purchases 283,000

Goods Available for Sale 333,000

Ending Inventory (FIFO cost) 99,600

Cost of Goods Sold 233,400

Gross Profit 206,600

Operating Expenses 98,000

Income from Operations 108,600

Income Tax Expense (30%) 32,580

Net Income $ 76,020

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:

                          |Acquisition Cost|                           

Item | Quantity | Per Unit | Total |    Market Value per Unit

A |       4,000    |   $ 5.50  |   $ 22,000 |    $ 7.00

B |       2,000    |     5.80   |   11,600    |       2.90

C |       8,000    |   4.00     |   32,000    |      7.00

D |   4,000        | 8.50      |   34,000     |      5.50

                                            $ 99,600

                                         ____________

1.	Restate the income statement to reflect LCM valuation of the ending inventory. Apply LCM on an item-by-item basis.

MONDETTA CLOTHING
Income Statement (LCM basis)
For the Year Ended December 31
Net Sales		$440,000
Cost of Goods Sold:
Beginning Inventory	$50,000
Purchases	283,000
Goods Available for Sale	333,000
Ending Inventory	99,600
Cost of Goods Sold		233,400
Gross Profit		206,600
Operating Expenses		98,000
Income from Operations		108,600
Income Tax Expense		32,580
Net Income		$76,020

2. Compare the LCM effect on each amount that was changed in requirement 1.

Item Changed	FIFO Cost Basis	LCM Basis	Amount of Increase (Decrease)
Ending Inventory
Cost of Goods Sold
Gross Profit
Income from Operations
Income Tax Expense
Net Income

Answer 1