Question

In the context of dollar-value LIFO, what is a LIFO layer?

Select one:

a. The LIFO value of an increase in the inventory for a given year.

b. The inventory in base year dollars.

c. The LIFO value of the inventory for a given year.

d. The difference between the LIFO inventory and the amount used for internal reporting purposes.

Answer 1

Answer is A.

The key concept in the dollar-value LIFO system is the conversion price index. To calculate the index, follow these steps:

1. Calculate the extended cost of the ending inventory at base year prices.
2. Calculate the extended cost of the ending inventory at the most recent prices.
3. Divide the total extended cost at the most recent prices by the total extended cost at base year prices.

These calculations yield an index that represents the change in prices since the base year. The calculation should be derived and retained for each year in which a business uses the LIFO method. This documentation will be needed to justify the period-end inventory costing calculation. Once the index is available, follow these additional steps to determine the cost of the LIFO cost layer in each successive period:

1. Determine any incremental increases in units of inventory in the next reporting period.
2. Calculate the extended cost of these incremental units at base year prices.
3. Multiply the extended amount by the conversion price index. This yields the cost of the LIFO layer for the next reporting period.