Springer Anderson Gymnastics prepared its annual financial statements dated December 31. The company reported its inventory using the LIFO inventory costing method but did not compare the cost of its ending inventory to its market value (replacement cost). The preliminary income statement follows:

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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Springer Anderson Gymnastics prepared its annual financial statements dated December 31. The company reported its inventory using the LIFO inventory costing method but did not compare the cost of its ending inventory to its market value (replacement cost). The preliminary income statement follows: 

 

 

**Income Statement for SPRINGER ANDERSON GYMNASTICS:**

*For the Year Ended December 31*

- **Sales Revenue:** $130,000

- **Cost of Goods Sold:**
  - Beginning Inventory: $12,500
  - Purchases: $86,000
  - Goods Available for Sale: $98,500
  - Ending Inventory: $20,100
  - **Cost of Goods Sold:** $78,400

- **Gross Profit:** $51,600

- **Operating Expenses:** $28,500

- **Income from Operations:** $23,100

- **Income Tax Expense:** $6,930

- **Net Income:** $94,570

**Explanation:**

The income statement reflects the application of the lower of cost or market/net realizable value (LCM/NRV) method to the ending inventory. This method ensures inventory is valued at the lower amount between the cost to purchase it and the net amount expected to be realized from its sale. The income statement details:

1. **Sales Revenue:** The total income from sales of goods or services.
2. **Cost of Goods Sold (COGS):** The direct costs attributable to the production of the goods sold in a company.
   - It starts with the beginning inventory, adds purchases, subtracts ending inventory, and results in the COGS.
3. **Gross Profit:** The profit a company makes after deducting COGS from sales revenue.
4. **Operating Expenses:** The costs required to run the business.
5. **Income from Operations:** The profit before income tax, calculated by subtracting operating expenses from gross profit.
6. **Income Tax Expense:** The amount of tax payable on the income.
7. **Net Income:** The total profit of the company after taxes.

This detailed breakdown provides insight into the financial performance and inventory valuation method of Springer Anderson Gymnastics for the stated year.
Transcribed Image Text:**Income Statement for SPRINGER ANDERSON GYMNASTICS:** *For the Year Ended December 31* - **Sales Revenue:** $130,000 - **Cost of Goods Sold:** - Beginning Inventory: $12,500 - Purchases: $86,000 - Goods Available for Sale: $98,500 - Ending Inventory: $20,100 - **Cost of Goods Sold:** $78,400 - **Gross Profit:** $51,600 - **Operating Expenses:** $28,500 - **Income from Operations:** $23,100 - **Income Tax Expense:** $6,930 - **Net Income:** $94,570 **Explanation:** The income statement reflects the application of the lower of cost or market/net realizable value (LCM/NRV) method to the ending inventory. This method ensures inventory is valued at the lower amount between the cost to purchase it and the net amount expected to be realized from its sale. The income statement details: 1. **Sales Revenue:** The total income from sales of goods or services. 2. **Cost of Goods Sold (COGS):** The direct costs attributable to the production of the goods sold in a company. - It starts with the beginning inventory, adds purchases, subtracts ending inventory, and results in the COGS. 3. **Gross Profit:** The profit a company makes after deducting COGS from sales revenue. 4. **Operating Expenses:** The costs required to run the business. 5. **Income from Operations:** The profit before income tax, calculated by subtracting operating expenses from gross profit. 6. **Income Tax Expense:** The amount of tax payable on the income. 7. **Net Income:** The total profit of the company after taxes. This detailed breakdown provides insight into the financial performance and inventory valuation method of Springer Anderson Gymnastics for the stated year.
**Transcription and Explanation for Educational Website**

---

**Financial Statement Overview:**

- **Sales Revenue:** $130,000

**Cost of Goods Sold Calculation:**

- **Beginning Inventory:** $12,500
- **Purchases:** $86,000
- **Goods Available for Sale:** $98,500
- **Ending Inventory:** $22,350

**Result:**

- **Cost of Goods Sold:** $76,150

**Profit and Expenses:**

- **Gross Profit:** $53,850
- **Operating Expenses:** $28,500
- **Income from Operations:** $25,350
- **Income Tax Expense (30%):** $7,605

**Net Income:**

- **$17,745**

---

**Inventory Restatement Requirement:**

The task is to restate the financial statements to incorporate the Lower of Cost or Market/Net Realizable Value (LCM/NRV) rule for the ending inventory. The table below provides details on the ending inventory.

**Ending Inventory Details:**

| Item | Quantity | Purchase Cost per Unit | Total Purchase Cost | Replacement Cost per Unit |
|------|----------|------------------------|--------------------|--------------------------|
| A    | 2,250    | $2.50                  | $5,625             | $3.50                    |
| B    | 700      | $3.00                  | $2,100             | $1.50                    |
| C    | 3,000    | $1.50                  | $4,500             | $0.75                    |
| D    | 2,250    | $4.50                  | $10,125            | $2.50                    |

- **Total:** $22,350

**Required Actions:**

1. **Restate the Income Statement:**
   - Adjust the income statement to reflect the LCM/NRV valuation of the ending inventory.
   - Apply the LCM/NRV calculation on an item-by-item basis.

2. **LCM/NRV Impact Comparison:**
   - Compare the effects of the LCM/NRV adjustment with the amounts in the original income statement.

---

This explanation and analysis can help in understanding how LCM/NRV adjustments impact financial reporting, specifically regarding inventory valuation and net income calculations.
Transcribed Image Text:**Transcription and Explanation for Educational Website** --- **Financial Statement Overview:** - **Sales Revenue:** $130,000 **Cost of Goods Sold Calculation:** - **Beginning Inventory:** $12,500 - **Purchases:** $86,000 - **Goods Available for Sale:** $98,500 - **Ending Inventory:** $22,350 **Result:** - **Cost of Goods Sold:** $76,150 **Profit and Expenses:** - **Gross Profit:** $53,850 - **Operating Expenses:** $28,500 - **Income from Operations:** $25,350 - **Income Tax Expense (30%):** $7,605 **Net Income:** - **$17,745** --- **Inventory Restatement Requirement:** The task is to restate the financial statements to incorporate the Lower of Cost or Market/Net Realizable Value (LCM/NRV) rule for the ending inventory. The table below provides details on the ending inventory. **Ending Inventory Details:** | Item | Quantity | Purchase Cost per Unit | Total Purchase Cost | Replacement Cost per Unit | |------|----------|------------------------|--------------------|--------------------------| | A | 2,250 | $2.50 | $5,625 | $3.50 | | B | 700 | $3.00 | $2,100 | $1.50 | | C | 3,000 | $1.50 | $4,500 | $0.75 | | D | 2,250 | $4.50 | $10,125 | $2.50 | - **Total:** $22,350 **Required Actions:** 1. **Restate the Income Statement:** - Adjust the income statement to reflect the LCM/NRV valuation of the ending inventory. - Apply the LCM/NRV calculation on an item-by-item basis. 2. **LCM/NRV Impact Comparison:** - Compare the effects of the LCM/NRV adjustment with the amounts in the original income statement. --- This explanation and analysis can help in understanding how LCM/NRV adjustments impact financial reporting, specifically regarding inventory valuation and net income calculations.
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