inventory method computed in dollars(i.e., cost figures) rather than units. After dividing ending inventory into homogeneous "groupings" or "pools," each pool is converted to base year prices by means of appropriate price indices. The difference between beginning and ending balances, as converted, becomes a measure of change in inventory quantity for the year. An increase is recognized as an inventory layer to be added to the beginning inventory. It is converted at the current price index and added to the dollars identified with the beginning balance. Assume 12/31/2005 physical inventory is $130,000. The price index in 2005 is 1.30. The base inventory is $80,000 as of 12/31/2004 with a price index of 1.00. The dollar value inventory at 12/31/2005 is $106,000 as determined below:
The tax law allows a simplified dollar-value LIFO method for taxpayers having average annual gross receipts for the three preceding taxable years of $5,000,000 or less. Under this method, taxpayers keep a separate inventory pool for items in each major category in the applicable government price index. The adjustment for each separate pool is based on the change from the preceding taxable year in the component of that index for the major category.
inventory method computed in dollars(i.e.,cost figures) rather than units. After inventory is divided into homogeneous groupings or "pools," each pool is converted to base-year prices by means of appropriate price indices. The difference between beginning and ending balances, as converted, becomes a measure of change in inventory quantity for the year. An increase is recognized as an inventory layer to be added to beginning inventory. It is converted at the current price index and added to the dollars identified with the beginning balance.
