Dollar value LIFO:



Dollar value LIFO:

why? to ease some of the headaches of LIFO (which, remember don't outweigh the headaches caused by paying higher taxes under other inventory methods)

Focus is even further removed from the physical unit flow. The inventory balance is determined for POOLS of INVENTORY DOLLARS:

example (simple in-class 3 years)

Gert's keeps her inventory on a FIFO basis for internal recordkeeping. In 1998, she adopted LIFO for financial reporting purposes. Gert's has the following information regarding inventory balances for the last 3 years:

Ending Inventory(FIFO) Index

Balance, 12/31/97 (LIFO beginning balance) $9,000 1.00

Balance, 12/31/98 (at end of yr dollars) $10,500 1.07

Balance, 12/31/99 (at end of yr dollars) $11,250 1.12

Balance, 12/31/00 (at end of yr dollars) $12,000 1.15

>>What's the INDEX? This index uses 1997 as the BASE YEAR. The index means that prices at the end of 1998 are 1.07 times what they were at the end of 1997. At the end of 1999, prices are 1.12 times what they were at the end of 1997.

Purchases: 1998 $25,000

Purchases: 1999 $20,000

Purchases: 2000 $20,000

Required: Compute the DV LIFO for 12/31/98, 99, and 00:

1998:

5 steps:

1) Convert ending inventory to base year dollars: (Remember this is ending inventory in 1998 $$- FIFO)

(Note: This amount tells you how much this same level of inventory would have cost in 1997)

2) Determine the change in base year dollars:

(1) -beginning inventory in BASE year dollars (*** this is tricky in Year 2! - use Year 1 line 1)

(Note: This tells you how much the inventory has grown, without the effects of price increases)

>>>>If the change is negative, you skip step 3 and you have to eat into the beginning inventory in BASE year $$, starting with the latest layer >>>>

3) Convert an INCREASE to CURRENT year dollars:

(2) * current year index

(Note: This is the inventory change (increase only) in current $$)

4) Add up LIFO layers to get ending DV LIFO:

1997: $9,000 DVLIFO

1998: $ DVLIFO

total $ DV LIFO

(Note: 1997 layer is in 1997 dollars, 1998 layer is in 1998 dollars)

5) Determine COGS (Use the INVENTORY IDENTITY):

Purchases = $25,000

COGS = Beg. Inventory DVLIFO + Purchases - End. Inventory DVLIFO

? = 9,000 +25,000 -?

=

Journal entry to change from FIFO to DVLIFO:

FIFO = $10,500, DVLIFO = $:

COGS $

Allowance to reduce FIFO to DVLIFO $

1999 & 2000 repeat steps> Be careful about lifo liquidation!

Summary of Steps for each year:

1998 1999 2000

1. Convert ending inventory to base year dollars:

2. Compute change in terms of base year dollars:

3. Convert increase to current year dollars:

4. Add current year layer to beg. DV LIFO inventory

5. Calculate Cost of goods Sold

Ending inventory is made up of the following layers:

1997

1998

1999

2000

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