Dollar Value LIFO I (Basics)
Most companies that use the LIFO cost flow assumption use either the dollar value LIFO ($value LIFO) method or the $value retail LIFO method to reduce the amount of record keeping and the danger of "involuntary LIFO liquidation". Under $value LIFO, only the total dollar value of inventory is examined, units are ignored. During inflation, the total cost of inventory may increase, even though its quantity has decreased. Consequently, when units are ignored, it becomes important to separate nominal dollar increases (due to inflation) from qunatity increases (the company actually has more inventory). For example, the company's inventory records show the following:
Beginning inventory (LIFO) $ 10,000
Ending inventory (actual cost) $ 14,000
In nominal dollars there obviously is an increase in inventory. However, it is not clear whether the company actually has more inventory or if it simply paid more and the actual quantity in ending inventory is the same or less than beginning inventory. To determine the correct $value LIFO ending inventory and cost of goods sold, qunatity increases must be separated from price increases. To do this a price index method is used.
