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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 –

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

On December 31, 2016, the inventory of Powhattan Company amounts to \(800,000. During 2017, the company decides to use the dollar-value LIFO method of costing inventories. On December 31, 2017, the inventory is \)1,053,000 at December 31, 2017, prices. Using the December 31, 2016, price level of 100 and the December 31, 2017, price level of 108, compute the inventory value at December 31, 2017, under the dollar-value LIFO method.

Case 1: T J International

T J International was founded in 1969 as Trus Joist International. The firm, a manufacturer of specialty building products, has its headquarters in Boise, Idaho. The company, through its partnership in the Trus Joist MacMillan joint venture, develops and manufactures engineered lumber. This product is a high-quality substitute for structural lumber and uses lower-grade wood and materials formerly considered waste. The company also is majority owner of the Outlook Window Partnership, which is a consortium of three wood and vinyl window manufacturers.

Following is T J International’s adapted income statement and information concerning inventories from its annual report.

T J International

Sales \(618,876,000

Cost of goods sold 475,476,000

Gross profit 143,400,000

Selling and administrative expenses 102,112,000

Income from operations 41,288,000

Other expense 24,712,000

Income before income tax 16,576,000

Income taxes 7,728,000

Net income \) 8,848,000

Inventories.Inventories are valued at the lower of cost or market and include material, labor, and production overhead costs. Inventories consisted of the following:

Current Year Prior Year

Finished goods \(27,512,000 \)23,830,000

Raw materials and

work-in-progress 34,363,00033,244,000

61,875,000 57,074,000

Reduction to LIFO cost (5,263,000) (3,993,000)

\(56,612,000 \)53,081,000

The last-in, first-out (LIFO) method is used for determining the cost of lumber, veneer, Microllamlumber, TJI joists, and open web joists. Approximately 35 percent of total inventories at the end of the current year were valued using the LIFO method. The first-in, first-out (FIFO) method is used to determine the cost of all other inventories.

Instructions

(a) How much would income before taxes have been if FIFO costing had been used to value all inventories?

(b) If the income tax rate is 46.6%, what would income tax have been if FIFO costing had been used to value all inventories ? In your opinion, is this difference in net income between the two methods material? Explain.

(c) Does the use of a different costing system for different types of inventory mean that there is a different physical flow of goods among the different types of inventory? Explain.

Arna, Inc. uses the dollar-value LIFO method of computing its inventory. Data for the past 3 years follow.

Year Ended December 31 Inventory at Current-Year Cost Price Index

2016 $19,750 100

2017 22,140 108

2018 25,935 114

Compute the value of the 2017 and 2018 inventories using the dollar-value LIFO method.

Question:Data for Amsterdam Company are presented in BE8-4. Compute the April 30 inventory and the April cost of

goods sold using the FIFO method.

(FIFO and LIFO) Harrisburg Company is considering changing its inventory valuation method from FIFO to LIFO because of the potential tax savings. However, management wishes to consider all of the effects on the company, including its reported performance, before making the final decision.

The inventory account, currently valued on the FIFO basis, consists of 1,000,000 units at \(8 per unit on January 1, 2017. There are 1,000,000 shares of common stock outstanding as of January 1, 2017, and the cash balance is \)400,000.

The company has made the following forecasts for the period 2017–2019.

2017

2018

2019

Unit sales (in millions of units)

1.1

1.0

1.3

Sales price per unit

\(10

\)12

\(12

Unit purchases (in millions of units)

1.0

1.1

1.2

Purchase price per unit

\)8

\(9

\)10

Annual depreciation (in thousands of dollars)

\(300

\)300

\(300

Cash dividends per share

\)0.15

\(0.15

\)0.15

Cash payments for additions to and replacement of plant and equipment (in thousands of dollars)

\(350

\)350

$350

Income tax rate

40%

40%

40%

Operating expenses (exclusive of depreciation) as a percent of sales

15%

15%

15%

Common shares outstanding (in millions)

1

1

1

Instructions

a. Prepare a schedule that illustrates and compares the following data for Harrisburg Company under the FIFO and the LIFO inventory method for 2017–2019. Assume the company would begin LIFO at the beginning of 2017.

  1. Year-end inventory balances.
  2. Annual net income after taxes.
  3. Earnings per share.
  4. Cash balance.

Assume all sales are collected in the year of sale and all purchases, operating expenses, and taxes are paid during the year incurred.

b. Using the data above, your answer to (a), and any additional issues you believe need to be considered, prepare a report that recommends whether or not Harrisburg Company should change to the LIFO inventory method. Support your conclusions with appropriate arguments.
See all solutions

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