7.04- Dollar-Value LIFO

Question 1

For most companies what is the inventory method that best matches their pricing policy?

Answer 1

LIFO

Question 2

What are the two potential difficulties from LIFO?

Answer 2

• the company needs to keep cumulative records that could go back to date the company was founded
• inventory that is old could be radically different from replacement cost

Question 3

What is Dollar-Value LIFO?

Answer 3

Related inventory is grouped into pools and uses an overall price index to approximate changes in inventory cost

Question 4

Under DV LIFO how do you keep track of inventory cost and price indexes?

Answer 4

Keep track with annual layers of inventory cost and price indexes from each inventory pool

Question 5

How does this method help with older costs of inventory?

Answer 5

reductions in the level of an inventory are offset by increases in the level of other items in the pool

Question 6

What two figures are needed to apply the DV LIFO method?

Answer 6

• total current cost of the inventory in the pool at the end of each year
• price index with the overall price level compared to the base date

Question 7

What are the three price level index approaches?

Answer 7

• simplified(CPI-given)
• link chain (compare with previous year)
• double extension (extend back to base year)

Question 8

What is the simplified method?

Answer 8

using generally available index of prices, like the Consumer Price Index(CPI)

Question 9

What is the double extension method?

Answer 9

the client counts the inventory and then extend inventory prices twice

Question 10

What is the link chain method?

Answer 10

year-to-year price changes are computed and then annual changes are linked together to determine a price index