Chap 8. LIFO Reserve

3.What is a LIFO Reserve?

Is the difference between the inventory method used for internal reporting purposes and LIFO, also called the Allowance to Reduce Inventory to LIFO. Adjusted annually. * Reported as a contra asset account to current asset Inventory on the Balance Sheet With consistently increasing costs, the LIFO reserve will have a credit balance, resulting in less costs reported in inventory. LIFO Inventory + LIFO Reserve = FIFO Inventory. (FIFO inventory is higher) If LIFO Reserve increases, add to COGS account to get COGS for income statement

9.Under what method are Profits Lowest?

LIFO

1.What do companies use LIFO for?

Many companies use LIFO for tax and external reporting

5.What is Specific Goods LIFO?

Costing goods on a unit basis is expensive and time consuming.

8. Under what method is Profits highest?

FIFO

2.What do companies use FIFO for?

FIFO for internal reporting. FIFO better for recordkeeping, pricing decisions, profit sharing arrangement.

7.What is Dollar Value LIFO?

Most common Instead of keeping track of individual items, pool the dollar value. Increases and decreases in a pool are measured in terms of total dollar value instead of quantity of goods. Price indexes are used to adjust inventory value at current prices to value at original prices, and inventory changes are restated using these layers. Price Index = Ending Inventory For the Period at Current Year Costs / Ending Inventory for the Period at Base Year Costs. It is more difficult to erode LIFO layers using dollar value technique than it is with specific goods pooled LIFO. Each layer in ending inventory is calculated by multiplying the layer at base year prices by the price index for the year the layer was added. Selecting an index - Most popular is CPI-U Companies can also use external indexes, or compute their own indexes internally

6.What is Specific Goods Pooled LIFO Approach?

Reduces recordkeeping and clerical costs. More difficult to erode the layers Using quantities as measurement basis can lead to untimely LIFO liquidations.

4.What is LIFO Liquidations?

The purpose of LIFO is to match current cost with current revenues. * When older, low-cost inventory is sold this results in a lower COGS, higher net income, and higher taxes. *The specific goods approach to costing LIFO inventories is unrealistic because accounting cost of tracking each item is expensive, and erosion of LIFO inventory can easily occur. *This LIFO liquidation distorts net income and leads to substantial tax payments. If a LIFO liquidation results in a significant increase in net income, this should be disclosed.

10. Under what method is midrange profit?

Average