Question

On Jan 1, 2010, the Michael-book Company adopted the dollar-value LIFO method for its one inventory pool. The pool's value on this date was $600,000. The 2010 and 2011 ending inventory valued at year-end costs were $690,000 and 714,960 respectively. The appropriate cost indexes are 1.04 for 2010 and 1.08 for 2011.

1. Calculate the ending inventory balance that Michael-book will report on its Dec 31, 2010 balance sheet.

2. Calculate the ending inventory balance that Michael-book will report on its Dec 31, 2011 balance sheet.

3. Explain in 1 to 3 sentences, why the dollar-value LIFO often results in less frequent LIFO liquidations.

Answer 1

Answer: 1 & 2- Calculation of Ending Inventory balance on 31-12-2010 & 31-12-2011:-

	Inventory Layers Converted to Base Year Cost			Inventory Layers Converted to cost
Date	Inventory at Year-End Cost		year end cost index		Inventory Layers at Base Year Cost			Inventory Layers at Base Year Cost		Year-End Cost Index	=	Inventory Layers Converted to Cost	Ending Inventory DVL Cost
01-01-2010	6,00,000	÷	1	=	6,00,000		Base	6,00,000	x	1	=	6,00,000	6,00,000
31-12-2010	6,90,000	÷	1.04	=	6,63,462		Base	6,00,000	x	1	=	6,00,000
							2010	63,462	x	1.04	=	66,000	6,66,000
31-12-2011	7,14,960	÷	1.08	=	6,62,000		Base	6,00,000	x	1	=	6,00,000
							2010	62,000	x	1.04	=	64,480
							2011	-	x	1.08	=	-	6,64,480

Answer:3

If inflation and other economic factors (such as supply and demand) were not an issue, dollar-value and non-dollar-value accounting methods would have the same results. However, since costs do change over time, the dollar-value LIFO presents the data in a manner that shows an increased cost of goods sold (COGS) when prices are rising, and a resulting lower net income. When prices are decreasing, dollar-value LIFO will show a decreased COGS and a higher net income. Dollar value LIFO can help reduce a company's taxes (assuming prices are rising), but can also show a lower net income on shareholder reports.