*** Adult Truths *** - An Email ForwardClass on MondaySlide 3Discussion QuestionDiscussion QuestionsSimplifying LIFO with LIFO Inventory PoolsDollar Value LIFO (DVL)Dollar-Value LIFO (DVL)Dollar-Value LIFO (DVL)Example 2: Dollar Value LIFO MethodExample 2: ContinuedExample 2: ContinuedExample 2: ContinuedExample 2: ContinuedExample 2: ContinuedExample 2: ContinuedLIFO LiquidationLIFO Liquidation Example ContinuedLIFO LiquidationExample 3: LIFO LiquidationExample 3: LIFO Liquidation ContinuedExample 3: LIFO Liquidation ContinuedDecision Makers’ PerspectiveLIFOBasis for Selection of Inventory MethodWhen Prices Are Rising . . .Example 1: Summary of ResultsQuality of EarningsE8-24E8-24 a.E8-24 b.*** Adult Truths *** - An Email Forward11.You never know when it will strike, but there comes a moment at work when you know that you just aren't going to do anything productive for the rest of the day.12.Can we all just agree to ignore whatever comes after Blue Ray? I don't want to have to restart my collection...again.13.I'm always slightly terrified when I exit out of Word and it asks me if I want to save any changes to my ten-page technical report that I swear I did not make any changes to.14.I think the freezer deserves a light as well.15.I keep some people's phone numbers in my phone just so I know not to answer when they call.16.I disagree with Kay Jewelers. I would bet on any given Friday or Saturday night more kisses begin with beer than Kay.17.I wish Google Maps had an "Avoid Ghetto" routing option.18.I have a hard time deciphering the fine line between boredom and hunger.Class on Monday• 8:00 351M 24 seats?• 9:30 351M 6 seats?•11:00 351M 5 seats?• 2:00 250M 26 seats?• 3:30 No classAlso, KPMG case competition infoCHAPTER 8CONTINUED VALUATION OF INVENTORIES: A COST-BASIS APPROACHSommers – ACCT 3311Discussion QuestionExplain why proponents of LIFO argue that it provides a better match of revenue and expenses. In what situation would it not provide a better match?Proponents of LIFO argue that it provides a better match of revenues and expenses because cost of goods sold includes the costs of the most recent purchases. These are matched with sales that reflect a current selling price. On the other hand, inventory costs in the balance sheet generally are out of date because they are derived from old purchase transactions. It is conceivable that a company’s LIFO inventory balance could be based on unit costs actually incurred several years earlier. When inventory quantity declines during a period, then these out-of-date inventory layers will be liquidated and cost of goods sold will match noncurrent costs with current selling prices.Discussion QuestionsQ8–18 Explain the following terms:(a) LIFO LayerA LIFO layer (increment) is formed when the ending inventory at base-year prices exceeds the beginning inventory at base-year prices.(b) LIFO ReserveThe difference between the inventory method used for internal purposes and LIFO.(c) LIFO EffectThe change in the LIFO reserve (Allowance to Reduce Inventory to LIFO) from one period to the next.Simplifying LIFO with LIFO Inventory Pools•The objectives of using LIFO inventory pools are to simplify recordkeeping by grouping inventory units into pools based on physical similarities of the individual units and to reduce the risk of LIFO layer liquidation.•For example, a glass company might group its various grades of window glass into a single window pool. Other pools might be auto glass and sliding door glass. A lumber company might pool its inventory into hardwood, framing lumber, paneling, and so on.•LIFO pools allow companies to account for a few inventory pools rather than every specific type of inventory separately.Dollar Value LIFO (DVL)•DVL extends the concept of inventory pools by allowing a company to combine a large variety of goods into one pool. Physical units are not used in calculating ending inventory. The technique helps companies simplify LIFO record-keeping, it also minimizes the probability of layer liquidation. At the end of the period, we determine if a new inventory layer was added by comparing ending inventory to beginning inventory. When using DVL we think in terms of inventory layers rather than inventory pools.•The goal of DVL is to determine if an increase in ending inventory over beginning inventory is due to a price increase of a real increase in inventory.Dollar-Value LIFO (DVL)1a. Compute a Cost Index for the year.1b. Deflate the ending inventory value using the cost index.1c. Compare ending inventory (at base year cost) to beginning inventory.Dollar-Value LIFO (DVL)2. Next, identify the layers in ending inventory and the years they were created.3. Convert each layer’s base year cost to layer year cost by multiplying times the cost index. 4. Sum all the layers to arrive at Ending Inventory at DVL cost.You are totally lost so let’s do this!Example 2: Dollar Value LIFO MethodOn January 1, 2011, the Taylor Company adopted the dollar-value LIFO method. The inventory value for its one inventory pool on this date was $400,000. Inventory data for 2011 through 2013 are as follows:Calculate Taylor’s ending inventory for 2011, 2012, and 2013. DateEnding Inventory at Year-End CostsCost Index12/31/11 $ 441,000 1.0512/31/12 487,200 1.1212/31/13 510,000 1.20Example 2: ContinuedOn January 1, 2011, the Taylor Company adopted the dollar-value LIFO method. The inventory value for its one inventory pool on this date was $400,000. Inventory data for 2011 is as follows:Calculate Taylor’s ending inventory for 2011. DateEnding Inventory at Year-End CostsCost Index12/31/11 $ 441,000 1.05Example 2: ContinuedAdjust 2011 inventory to 2010 base-year prices:$441,000 / 1.05 = $420,000Calculate current year LIFO layer:$420,000 – $400,000 = $20,000Add the new LIFO layer at end of period prices to prior year LIFO inventory:$400,000 * 1.00 = $400,000 20,000 * 1.05 = 21,000 $421,000Example 2: ContinuedOn January 1, 2011, the Taylor Company adopted the dollar-value LIFO method. The inventory value for its one inventory pool on this date was $400,000. Inventory data for 2011 through 2012 are as follows:Calculate Taylor’s ending inventory for 2012. DateEnding Inventory at Year-End CostsCost Index12/31/11 $ 441,000 1.0512/31/12 487,200 1.12Example 2: ContinuedAdjust 2012 inventory to 2010 base-year prices:$487,200 / 1.12 = $435,000Calculate current year LIFO layer:$435,000 – $420,000 =