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Chapter 8: 16Q (page 421)

What is the dollar-value method of LIFO inventory valuation? What advantage does the dollar-value method have over the specific goods approach of LIFO inventory valuation? Why will the traditional LIFO inventory costing method and the dollar-value LIFO inventory costing method produce different inventory valuations if the composition of the inventory base changes?

Short Answer

Expert verified

The dollar value LIFO method is an alternative to the traditional LIFO method to overcome the issue of LIFO liquidation. This method allows goods replacement and prevents erosion of LIFO layers. Difference in inventory value arises because dollar-value method considers the index and base price.

Step by step solution

01

Dollar-value LIFO method

The dollar value LIFO method is the measure to determine the ending inventory value in dollar (value) terms and not in physical quantity terms. In this method, total pool values of inventories are taken instead of valuing inventories individually.

02

Advantage of dollar-value LIFO method over specific goods method

The dollar value LIFO method has an added advantage over specific goods method in the term that 鈥�

a) Dollar value LIFO method consists of a larger pool of similar goods.

b) This method permits the replacement of goods.

c) This method prevents the erosion of LIFO layers.

03

Difference in results between dollar value LIFO and traditional LIFO

The dollar value LIFO method provides the result after taking into effect of price index and base prices. Thus LIFO liquidation is minimum in this approach. In contrast, traditional LIFO does not address these issues and the LIFO layers get erosion due to the lesser range of goods in the pool.

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Most popular questions from this chapter

Question:Two or more items are omitted in each of the following tabulations of income statement data. Fill in the amounts that are missing.

2016 2017 2018

Sales revenue \(290,000 \) ?$410,000

Sales returns and allowances 11,000 13,000 ?

Net sales ? 347,000 ?

Beginning inventory 20,000 32,000 ?

Ending inventory ? ? ?

Purchases ? 260,000 298,000

Purchase returns and allowances 5,000 8,000 10,000

Freight-in 8,000 9,000 12,000

Cost of goods sold 233,000 ? 293,000

Gross profi t on sales 46,000 91,000 97,000

At December 31, 2016, Stacy McGill Corporation reported current assets of \(370,000 and current liabilities of \)200,000. The following items may have been recorded incorrectly.

1. Goods purchased costing \(22,000 were shipped f.o.b. shipping point by a supplier on December 28. McGill received andrecorded the invoice on December 29, 2016, but the goods were not included in McGill鈥檚 physical count of inventorybecause they were not received until January 4, 2017.

2. Goods purchased costing \)15,000 were shipped f.o.b. destination by a supplier on December 26. McGill received andrecorded the invoice on December 31, but the goods were not included in McGill鈥檚 2016 physical count of inventorybecause they were not received until January 2, 2017.

3. Goods held on consignment from Claudia Kishi Company were included in McGill鈥檚 December 31, 2016, physical countof inventory at \(13,000.

4. Freight-in of \)3,000 was debited to advertising expense on December 28, 2016.

Instructions

(a) Compute the current ratio based on McGill鈥檚 balance sheet.

(b) Recompute the current ratio after corrections are made.

(c) By what amount will income (before taxes) be adjusted up or down as a result of the corrections?

As compared with the FIFO method of costing inventories, does the LIFO method result in a larger or smaller net income in a period of rising prices? What is the comparative effect on net income in a period of falling prices?

Why should inventories be included in (a) a statement of financial position and (b) the computation of net income?

The following information relates to the Jimmy Johnson Company.

Ending Inventory Price

Date (End-of-Year Prices) Index

December 31, 2013 $ 70,000 100

December 31, 2014 90,300 105

December 31, 2015 95,120 116

December 31, 2016 105,600 120

December 31, 2017 100,000 125

Instructions

Use the dollar-value LIFO method to compute the ending inventory for Johnson Company for 2013 through 2017.
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