Dollar Value LIFO

Accounting Study Guide

U.S. GAAP

IFRS, IAS

Accounting Topics

Dollar Value LIFO

U.S. GAAP Codification, Accounting Standards ASC,

International Financial Reporting Standards (IFRS)

U.S. GAAP by Topic, Accounting by Topic, Securities Law Library

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

Click here for pdf version of solutions to Example 1 (Company A).

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

Click here for pdf version of solutions to Example 2 (Company B).

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

Click here for pdf version of solutions to Example 3 (Company C).

Overview of Inventories

Dollar Value LIFO Example 1 in pdf file

Dollar Value LIFO Example 2 in pdf file

Dollar Value LIFO Example 3 in pdf file