Accounting Study Guide
 U.S. GAAP Codification IFRS International Standards Accounting Topics

 Dollar Value LIFO

Steps of Dollar Value LIFO

Determine the value of ending inventory at current cost.

Inventory at current cost --> Inventory at base year cost

Apply LIFO on the layers of inventory at base year cost.

LIFO Inventory at base year cost --> Inventory at added year cost

Example 1 (Company A)

Company A adopted Dollar Value LIFO on January 1, 2006.
 Date Inventory at current year cost Cost index 1/1/2006 \$800,000 1.00 12/31/2006 \$860,000 1.06 12/31/2007 \$950,000 1.14 12/31/2008 \$980,000 1.21 12/31/2009 \$1,050,000 1.27

Example 1 (Solutions, Dollar Value LIFO)

Application of Dollar Value LIFO

 Date Inventory at base year cost Inventory layers Year of layer Inventory at added year cost Inventory (Dollar Value LIFO) 12/31/2006 \$811,321 (*1) \$800,000 Base layer \$800,000 \$11,321 2006 \$12,000 (*2) \$812,000 12/31/2007 \$833,333 (*3) \$800,000 Base layer \$800,000 \$11,321 2006 \$12,000 (*2) \$22,013 (*4) 2007 \$25,094 (*5) \$837,094 12/31/2008 \$809,917 (*6) \$800,000 Base layer \$800,000 \$9,917 (*7) 2006 \$10,512 (*8) \$810,512 12/31/2009 \$826,772 (*9) \$800,000 Base layer \$800,000 \$9,917 2006 \$10,512 (*8) \$16,854 (*10) 2009 \$21,405 (*11) \$831,937

Notes:

(*1)  \$860,000 x (1.00/1.06) = \$811,321
(*2)  \$11,321 X 1.06 = \$12,000
(*3)  \$950,000 x (1.00/1.14) = \$833,333
(*4)  \$833,333 - \$800,000 - \$11,321 = \$22,013
(*5)  \$22,013 X 1.14 = \$25,094
(*6)  \$980,000 x (1.00/1.21) = \$809,917

(*7)  12/31/2008 inventory decreased from 12/31/2007 by \$23,416 at base year cost (\$809,917 - \$833,333 = -\$23,416).
By applying LIFO, \$23,416 decrease is applied to recently added layers first.
--> \$22,013 layer added in 2007 is reduced first.
Additional \$1,403 (= \$23,416 - \$22,013) is subtracted from the \$11,321 layer added in 2006.
--> Layer added in 2006 is reduced to \$9,917 (= \$11,321 - \$1,403).

(*8)  \$9,917 X 1.06 = \$10,512
--> Cost index 1.06 is used because \$9,917 layer was added in 2006.
(*9)  \$1,050,000 x (1.00/1.27) = \$826,772
(*10)  \$826,772 - \$800,000 - \$9,917 = \$16,854
(*11)  \$16,854 X 1.27 = \$21,405

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Example 2 (Company B)

Company B adopted Dollar Value LIFO on January 1, 2006.
 Date Inventory at current year cost Cost index 1/1/2006 \$650,000 1.00 12/31/2006 \$760,000 1.04 12/31/2007 \$810,000 1.08 12/31/2008 \$830,000 1.16 12/31/2009 \$960,000 1.22

Example 2 (Solutions, Dollar Value LIFO)

Application of Dollar Value LIFO

 Date Inventory at base year cost Inventory layers Year of layer Inventory at added year cost Inventory (Dollar Value LIFO) 12/31/2006 \$730,769 (*1) \$650,000 Base layer \$650,000 \$80,769 2006 \$84,000 (*2) \$734,000 12/31/2007 \$750,000 (*3) \$650,000 Base layer \$650,000 \$80,769 2006 \$84,000 (*2) \$19,231 (*4) 2007 \$20,769 (*5) \$754,769 12/31/2008 \$715,517 (*6) \$650,000 Base layer \$650,000 \$65,517 (*7) 2006 \$68,138 (*8) \$718,138 12/31/2009 \$786,885 (*9) \$650,000 Base layer \$800,000 \$65,517 2006 \$68,138 (*8) \$71,368 (*10) 2009 \$87,069 (*11) \$831,937

Notes:

(*1)  \$760,000 x (1.00/1.04) = \$730,769
(*2)  \$80,769 X 1.04 = \$84,000
(*3)  \$810,000 x (1.00/1.08) = \$750,000
(*4)  \$750,000 - \$650,000 - \$80,769 = \$19,231
(*5)  \$19,231 X 1.08 = \$20,769
(*6)  \$830,000 x (1.00/1.16) = \$715,517

(*7)  12/31/2008 inventory decreased from 12/31/2007 by \$34,483 at base year cost (\$715,517 - \$750,000 = -\$34,483).
By applying LIFO, \$34,483 decrease is applied to recently added layers first.
--> \$19,231 layer added in 2007 is reduced first.
Additional \$15,252 (= \$34,483 - \$19,231) is subtracted from the \$80,769 layer added in 2006.
--> Layer added in 2006 is reduced to \$65,517 (= \$80,769 - \$15,252).

(*8)  \$65,517 X 1.04 = \$68,138
--> Cost index 1.04 is used because \$65,517 layer was added in 2006.
(*9)  \$960,000 x (1.00/1.22) = \$786,885
(*10)  \$786,885 - \$650,000 - \$65,517 = \$71,368
(*11)  \$71,368 X 1.22 = \$87,069

Example 3 (Company C)

Company C adopted Dollar Value LIFO on January 1, 2006.
 Date Inventory at current year cost Cost index 1/1/2006 \$300,000 1.00 12/31/2006 \$430,000 1.10 12/31/2007 \$480,000 1.20 12/31/2008 \$485,000 1.26 12/31/2009 \$550,000 1.35

Solutions to Example 3:

 Date Inventory (Dollar Value LIFO) 1/1/2006 \$300,000 12/31/2006 \$400,000 12/31/2007 \$410,909 12/31/2008 \$393,413 12/31/2009 \$423,770