how do I find the amount of inventory under the dollar value using the LIFO method?
how do I find the amount of inventory under the dollar value using the LIFO method?
Dollar value LIFO Method:
Dollar value LIFO is a method which is basically used for inventory that follows LIFO i.e. Last In First Out Model .
In this method, basically putting inventories into the pools and accounting for them based on their dollar value.
Let's understand it through an example:
A company adopted dollar-value LIFO method on December 31, 2011. The inventory on current prices at the end of 2011,2012 and 2013 was as follows:
December 31, 2011(end of year prices): $270,000
December 31, 2012(end of year prices): $330,000
December 31, 2013(end of year prices): $360,000
Price Index are 100,110 and 125 respectively.
Required: Compute the amount of inventory using dollar-value LIFO method.
Solution:
1) First of all, compute the value of ending inventory at base-year-prices. It is computed using the following formula:
Ending inventory at base-year-prices = Ending inventory at end of year prices / Price index for that year
Ending inventory at base-year-prices (31-12-2011) = $270,000/1.00
= $270,000.
Ending inventory at base-year-prices (31-12-2012) = $330,000/1.10
= $300,000.
Ending inventory at base-year-prices (31-12-2013) = $360,000/1.25
= $288,000.
2) Now we can compute the real-dollar quantity increase in inventory as inflation is factor out by finding Ending inventory at base-year-prices :
For 31-12-2012 = ($300,000 – $270,000)
= $30,000.
For 31-12-2013 = ($288,000 $300,000)
= $12,000. In this case will not adding another layer but going to reduce existing layer.
3) The next step is to value this real dollar quantity increase in inventory at year-end-prices:
For 31-12-2012 = $30,000 × 1.10
= $33,000
For 31-12-2013 = ($30,000 $12,000) × 1.10
= $19,800
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