journalize the adjusting entry for inventory if any is required 559730

Applying the lower of cost or market rule to inventories

Naturally Good Foods reports inventory at the lower of average cost or market. Prior to releasing its March 2012 financial statements, Naturally’s preliminary income statement, before the year end adjustments, appears as follows:

NATURALLY GOOD FOODS Income Statement (partial) For the year ended March 31, 2012

Sales revenue

$ 117,000

Cost of goods sold


Gross profit

$ 72,000

Naturally has determined that the replacement cost of ending inventory is $17,000. Cost is $18,000.


1. Journalize the adjusting entry for inventory, if any is required.

2. Prepare a revised income statement to show how Naturally Good Foods should report sales, cost of goods sold, and gross profit.

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