Currency Value LIFO Method

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Currency Value LIFO is a modified original LIFO technique the place the ending inventory can be measured based on the monetary cost of gadgets as an alternative to the number of gadgets held. The method is used to take away the problems of LIFO insolvency. In this method, goods are blended into groups, and all can be decreased and accelerated in one pool the place it is measured in consideration of the total dollar value. The technique sums the amount information for huge sums of stock that makes the character not to demand the compilation of each object of the stock items. Under the technique, the easy method is calculating the conversion fee index based on the assessment of year-end inventory to that of base year cost. The method is more efficient in the provision of a different angle of the firm’s balance sheet. It is suitable for the businesses that have a vast number of the products and anticipate a significant future change in the product mix.

In most cases, the dynamic nature of the prices and inflation is crucial to this method. Most of the firms utilize the price-level index that is provided by the federal government on a monthly basis. Some companies make use of external price indexes that are more- specific. In addition, some business associations prepare the indexes for some precise products. The above indexes can be successfully used for the dollar-value purposes (Gordon et al. 87). The following steps are used in the calculating the index. Firstly, calculation of the increased value of ending stock at base year prices is done. Secondly, calculate the extended cost of the ending inventory at the most recent prices. Lastly, divide the sum of the extended value at the most recent prices by the total extended cost at the base year prices. According to Gordon et al., the results of the calculation given the index that denotes the change in prices of the base year (90). The technique can be used to generate separate indexes for diverse pools of the inventory. To minimize the labor cost in the calculation, the number of the pools employed in the inventory should be reduced.

Advantages of the method.

There is a minimal requirement for the record keeping.

It decreases the cost of accounting for the inventory.

Reduces the probability of the unintended liquidation of LIFO inventory

Disadvantages of the technique

It can be costly if large number of pools are considered in the calculations due to need of more labor source

Example one

A firm started a year with inventory worth 300,000. At the end of the year, the report indicated that inventory worth 520,000 is held. If prices have risen by 25%during the year, calculate the inventory cost under the dollar-value LIFO method.

Solution

At start of the year 100% at the end =125% due to 25% increase

Therefore, 520,000×100÷125=416,000

416,000-300,000 = 116,000.

116,000×1.25 = 145,000

Closing inventory as per dollar-value LIFO = 300,000 + 145,000 = 445,000

Example two

An entity’s beginning inventory was 100,000. At the end of the year total value of inventory was 120,000. By assuming that prices raised by 20% during the year.

Solution

120,000×100÷120=100,000 the ending inventory value is equal to beginning inventory value indicating no real change in the number of units and the inflation caused the value increase.

Therefore, closing of inventory as per dollar-value LIFO = 100,000 + 0 = 100,000

Work cited

Gordon, Elizabeth A., Jana Smith Raedy, and Alexander John Sannella. Intermediate

Accounting. Pearson, 2016.

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