LIFO dollar value
What is the LIFO dollar value?
LIFO dollar value is an accounting method used for inventories that follows the last in, first out model. Dollar Value LIFO uses this approach with all dollar figures rather than inventory units. It offers a different view of the balance sheet than other accounting methods such as first in, first out (FIFO). In an inflationary environment, it can more closely track the effect of the dollar value of cost of goods sold (COGS) and the resulting effect on bottom line than counting inventory items in terms of units.
How Cash Value LIFO Works
If inflation and other economic factors (such as supply and demand) were not a problem, the dollar value and dollar value accounting methods would have the same results. However, because costs change over time, the dollar-value LIFO presents the data in a way that shows an increase in the cost of goods sold (COGS) as prices rise, and a lower net income that result. When prices decrease, the LIFO dollar value will show decreased COGS and higher net income. LIFO Dollar Value can help lower a company’s taxes (assuming prices go up), but can also show lower net income on shareholder reports.
Key points to remember
- The LIFO method of accounting uses the last in, first out model.
- This model is based on the calculation of the conversion price index.
Understanding the LIFO dollar method
The LIFO dollar value method is based on a calculation of the conversion price index, itself based on the calculation of a comparison of the base costs at the end of the year with the dollar value of the stocks at the end of the year. ‘year. The following steps are used to calculate the conversion price index:
- Calculate the total cost of year-end inventory at base year prices.
- Calculate the total cost of year-end inventory at the most recent prices for the goods.
- Divide number two by number one. This should give you a conversion price index that represents the change in the dollar value of the commodities since the base year.
This calculation method must be followed, and the results kept, for each year in which a company follows the LIFO dollar accounting method. The conversion index can be used to calculate the LIFO cost layer for each period, but by following these steps:
- Calculate any increase in inventory units for the next reporting period.
- Calculate the total cost of these new units at base year prices.
- Multiply the extended amount by the conversion price index to find the cost of the LIFO layer for the next reporting period.
Why use the LIFO dollar method?
Dollar Value LIFO places all commodities in pools, measured in terms of the total dollar value, and any decreases or increases in those pools are measured in terms of the total dollar value of the pool. The LIFO dollar-value approach allows companies to place more goods in a single pool, rather than being limited, for example, to placing only substantially similar items in a pool, as in the LIFO method. pool of specific goods.
The companies that use the LIFO dollar method are the ones that both maintain a large number of products and expect the product line to change significantly in the future. The LIFO dollar method allows companies to avoid calculating individual price layers for each item in inventory. Instead, they can calculate layers for each inventory pool. However, at a certain point this is no longer profitable, so it is essential to ensure that pools are not created unnecessarily.