Dollar-Value LIFO

What Is Dollar-Value LIFO?

Dollar-value LIFO is an accounting method utilized for inventory that follows the last-in-first-out model. Dollar-value LIFO involves this approach with all figures in dollar amounts, as opposed to in inventory units. It gives an alternate perspective on the balance sheet than other accounting methods, for example, first-in-first-out (FIFO). In an inflationary environment, it can all the more closely track the dollar value effect of cost of goods sold (COGS) and the subsequent effect on net income than including the inventory things in terms of units.

How Dollar-Value LIFO Works

In the event that inflation and other economic factors (like supply and demand) were not an issue, dollar-value and non-dollar-value accounting methods would have similar outcomes. Notwithstanding, since costs truly do change over the long run, the dollar-value LIFO presents the data in a way that shows an increased cost of goods sold (COGS) when prices are rising, and a subsequent lower net income. At the point when prices are decreasing, dollar-value LIFO will show a diminished COGS and a higher net income. Dollar value LIFO can assist with lessening a company's taxes (expecting prices are rising), however can likewise show a lower 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 working out a comparison of base year-end costs to the dollar value of year-end inventory. The accompanying advances are utilized to compute the conversion price index:

1. Ascertain the extended cost of end-year inventory at base-year prices.
2. Ascertain the extended cost of end-year inventory at the latest prices for the goods.
3. Partition number two by number one. This ought to give you a conversion price index that addresses the change in the dollar value of the goods since the base year.

This calculation method ought to be followed, and the outcomes retained, for each year where a company follows the dollar-value LIFO method of accounting. The conversion index can be utilized to compute the LIFO cost layer for every period, except following these means:

1. Compute any expansions in units of inventory for the next reporting period.
2. Compute the extended cost of these new units at base-year prices.
3. Increase 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, estimated in terms of total dollar value, and all reductions or increments to those pools are estimated in terms of the total dollar value of the pool. The dollar-value LIFO approach permits companies to place a larger number of goods into a single pool, as opposed to being restricted to, for instance, putting just substantially comparable things into a pool, as in the specific goods pooled LIFO method.

Companies that utilization the dollar-value LIFO method are those that both keep a large number of products, and expect that product mix to change substantially from now on. The dollar-value LIFO method permits companies to try not to compute individual price layers for every thing of inventory. All things considered, they can work out layers for each pool of inventory. In any case, at one point, this is not generally cost-effective, so it's fundamental to guarantee that pools are not being made superfluously.

Features

• The LIFO accounting method involves the toward the end in-first-out model.
• This model is based on the conversion price index calculation.