Question

Arruza Co. is considering switching from the specific-goods LIFO approach to the dollar-value LIFO approach. Because the financial personnel at Arruza know very little about dollar-value LIFO, they ask youto answer the following questions.

(a) What is a LIFO pool?

(b) Is it possible to use a LIFO pool concept and not use dollar-value LIFO? Explain.

(c) What is a LIFO liquidation?

(d) How are price indexes used in the dollar-value LIFO method?

(e) What are the advantages of dollar-value LIFO over specific-goods LIFO?

Short answer

Groups of similar inventories make the LIFO pool. It is not possible to use a single method. LIFO liquidation is a problem of selling old inventory. The ending inventory at dollar value LIFO for Dec 2018 comes out to be $120,945. There are five major steps to determine the dollar value of LIFO.

Step-by-step solution

LIFO Pool

A pool is a group of items that have similar nature. A LIFO pool is a group of similar inventories pooled together to avoid the LIFO liquidation problem.

LIFO pool vs. dollar value LIFO

No, it is not possible to use only one inventory method as different inventories require different attention. LIFO pools can be time-consuming, costly, and lead to the erosion of layers. Dollar value LIFO overcome these issues by only taking the dollar value and not the physical quantities of goods.

LIFO Liquidation

LIFO liquidation is the problem of piling up older inventories and selling them at discounted prices. This happens due to the LIFO approach; all the newest inventories are used first, and only older inventories are leftover.

Price index and dollar value LIFO

The price index is the essential factor to determine the dollar value LIFO. The price index is the ratio of the current year’s prices to the base year’s prices.

For determining the dollar-value LIFO. The layers at base cost are converted to the current level by taking the product of layers at the base level and price index.

The obtained product is summed up to get the inventory value.

Advantages of dollar value LIFO over specific identification. 

Specific identification is a complex and time-consuming method in which each item is matched with the specific inventories to be sold. Whereas, Under the dollar-value LIFO method the values of ending inventories are matched with the base year prices.