CHAPTER 8 Methods of Simplifying LIFO

CHAPTER 8 Methods of Simplifying LIFO - Inventories...

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Inventories: Measurement METHODS OF SIMPLIFYING LIFO LIFO Reserve Companies that use LIFO for tax and financial reporting many times maintain their internal records using one of the more conservative cost flow assumptions. This results in a difference between the internal books and external reporting. To account for this difference the company will establish a LIFO reserve account that adjusts the book inventory to LIFO at the end of the accounting period. A change in the reserve account at the end of the year is called the LIFO effect. If the value of inventory valued at LIFO decreases during the year this is called LIFO liquidation. It is possible for one or more LIFO layers (years) to be liquidated an accounting period. Once a layer is liquidated it can never be reestablished. The establishment of a LIFO layer can only take place in the current year. LIFO Inventory Pools Rather than accounting for each type of inventory separately, inventory items with similar qualities can be grouped together into an inventory pool. This reduces the amount of bookkeeping and smoothes out the fluctuations in LIFO layers from one year to the next. Dollar-Value LIFO Dollar-Value LIFO is the most widely used method. It is measured based on constant dollars rather that the physical quantity of goods in an inventory pool. A new LIFO layer is established only when the ending inventory at base-year prices exceeds the beginning inventory at base-year
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This note was uploaded on 02/01/2012 for the course ACF ACC220 taught by Professor Fiona during the Spring '08 term at Seneca.

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CHAPTER 8 Methods of Simplifying LIFO - Inventories...

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