Question

Huddell Company, which is both a wholesaler and retailer, purchases merchandise from various suppliers. The dollar-value LIFO method is used for the wholesale inventors. Huddell determines the estimated cost of its retail ending inventories using the conventional retail inventory method, which approximates lower average cost or market.

1. a. What are the advantages of using the dollar-value LIFO method A opposed to the traditional LIFO method?

b. How does the application of the dollar-value LIFO method differ from the application of the traditional LIFO method?

2. a. In the calculation of the cost-to-retail percentage used to determine the estimated cost of its ending inventories, how should Huddell use: Net Markups? Net Markdowns?

b. Why does Huddell's retail inventory mehod approximate lower of average cost or market?

"Thank You"

Answer 1

1.a. The dollar-value LIFO method has two major benefits over traditional unit LIFO method.

Unlike unit LIFO that group specific units based on quantities and respective rates. This makes calculation cumbersome. Dollar-value LIFO pools the items together and measure the value based on change in the total value of the pool and not the quantity.

Unit LIFO method is prone to delayering because it records and maintains the specific quantity bought at specific rate as each individual layer. If old units are consumed it can seriously distort profit figures making it to appear more. Dollar value solves this as a result of pooling the goods on the basis of value and not the individual quality and rate. Also, the effect of inflation is reduced by properly accounting inflation effect in terms of money value.

.b. The application of dollar-value LIFO is based on dollars of inventory, an inventory cost index for each year, and broad inventory pools. The inventory layers are identified with the inventory cost index for the year in which the layer was added. In contrast, traditional LIFO is applied to individual units at their cost.

2.a.Huddell’s net markups should be included only in the retail amounts (denominator) to determine the cost-to-retail percentage. Huddell’s net markdowns should be ignored in the calculation of the cost-to-retail percentage.

2.b.By not deducting net markdowns from the retail amounts to determine the cost-to-retail percentage, Huddell produces a lower cost-to-retail percentage than would result if net markdowns were deducted. Applying this lower percentage to ending inventory at retail, the inventory is reported at an amount below cost. This amount is intended to approximate the lower of average cost or market.