Fundamentals of Financial Accounting 4th Edition by Fred Phillips,Robert Libby,Patricia Libby

Exercise 56

Evaluating the Income Statement and Income Tax Effects of Lower of Cost or Market
Springer Anderson Gymnastics prepared its annual financial statements dated December 31, 2012. The company used the FIFO inventory costing method, but it failed to apply LCM to the ending inventory. The preliminary 2012 income statement follows:

Assume that you have been asked to restate the 2012 financial statements to incorporate LCM. You have developed the following data relating to the 2012 ending inventory:

Required:
1. Restate the income statement to reflect LCM valuation of the 2012 ending inventory. Apply LCM on an item-by-item basis and show computations.
2. Compare and explain the LCM effect on each amount that was changed in requirement 1.
3. What is the conceptual basis for applying LCM to merchandise inventories