What Is Dollar-Value LIFO?

Dollar-value LIFO is an accounting method used for inventory that follows the last-in-first-out model. Dollar-value LIFO uses this approach with all figures in dollar amounts, rather than in inventory units. It provides a different view of the balance sheet than other accounting methods such as 澳洲幸运5开奖号码历史查询:first-in-first-out (FIFO). In an inflationary environment, it can more closely track the dollar value effect of cost of goods sold (COGS) and the resulting effect on net inco❀me than counting the in🔯ventory items in terms of units.

How Dollar-Value LIFO Works

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 澳洲幸运5开奖号码历史查询:net income on shareholder reports.

Understanding the Dollar-Value LIFO Method

The dollar-value LIFO method is based on a calculation of the conversion price index, which is itself based on calculating a comparison of base year-end costs to t💧he dollar value of year-end inventory. The following steps are used to calculate the conversion price index:

1. Calculate the extended cost of end-year inventory at base-year prices.
2. Calculate the extended cost of end-year inventory at the most recent prices for the goods.
3. Divide number two by number one. This should give you a conversion price index that represents the change in the dollar value of the goods since the base year.

💖 This calculation method should be followed, and the results retained, for every year in which a company follows the dollar-value LIFO method of accounting. T🐓he conversion index can be used to calculate the LIFO cost layer for each period, but following these steps:

1. Calculate any increases in units of inventory for the next reporting period.
2. Calculate the extended cost of these new units at base-year prices.
3. Multiply the extended amount by the conversion price index to find the cost of the LIFO layer for the next reporting period.

Why Use the Dollar-Value LIFO Method?

Dollar-value LIFO places all goods into pools, measured in terms of total dollar valu🌸e, and all decreases or increases to those pools are measured in terms of the total dollar value oဣf the pool. The dollar-value LIFO approach allows companies to place a larger number of goods into a single pool, rather than being restricted to, for example, placing only substantially similar items into a pool, as in the specific goods pooled LIFO method.

Companies that use the dollar-value LIFO method are those that both maintain a large number of products, and expect that product mix to change substantially in the future. The dollar-value LIFO method allows companies to avoid calculating individual price layers for each item of inventory. Instead, they can calculat💎e layers for each pool of inventory. However, at a certain point, this is no longer cost-effective, so it’s vital to ensure that pools are not being created unnecessarily.