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Even though the LIFO cost flow assumption will reduce taxable income and the related cash outflow for income taxes, there are certain difficulties encountered with its implementation.Thus, dollar-value LIFO is often used.
Required:
Discuss three different ways that the dollar-value LIFO method overcomes some of the difficulties in the application of the LIFO approach.
On Jun 30, 2024
Three difficulties involved in the application of the LIFO approach are (1)it requires a great deal of detailed record keeping to measure changes in the number of units held and sold, (2)fluctuations in individual items held may lead to liquidation of the LIFO layers, and (3)technological changes may result in an individual item's LIFO layer being reduced to zero.The dollar-value LIFO method can reduce the first problem because it uses current costs and cost indexes to measure the dollar change in inventory, not the unit change.The second and third problems can be eliminated through the use of inventory pools.The more types of goods included in a pool, the greater the probability that decreases in some goods will be offset by increases in other goods, thereby avoiding the liquidation of the LIFO layers.