A firm uses the dollar value LIFO retail method and has $2,000 in beginning inventory at retail at the beginning of the current year. The base year equivalent of this amount is $1,600. The base year index is 1.00. The beginning inventory reported in the Balance Sheet is $800. During the current year, the firm purchased $12,000 of inventory at cost and marked that up to $40,000. Sales for the year were $28,000. The relevant ending price index is 1.60. What amount does this firm report as inventory in its Balance Sheet at the end of the current year?

 A firm uses the dollar value LIFO retail method and has $2,000 in beginning inventory at retail at the beginning of the current year. The base year equivalent of this amount is $1,600. The base year index is 1.00. The beginning inventory reported in the Balance Sheet is $800. During the current year, the firm purchased $12,000 of inventory at cost and marked that up to $40,000. Sales for the year were $28,000. The relevant ending price index is 1.60. What amount does this firm report as inventory in its Balance Sheet at the end of the current year?
$4,286
$13,440
$4,232
$4,200

Answer

$4,232

 You Answered Correctly!
This is a two-step process. First, DV LIFO is applied to retail dollars to determine the layer added in current-year retail dollars. Then, the FIFO cost-to-retail ratio (C/R) is applied to convert that layer to cost. Finally, this layer is added to beginning inventory at cost to yield ending inventory at cost. The calculation is:

EI retail, current index = $2,000 + $40,000-$28,000 = $14,000

EI retail, base = $14,000/1.6 = $8,750

Increase in EI retail, base = $8,750-$1,600 = $7,150

Increase in EI retail, current = $7,150(1.6) = $11,440

C/R (use FIFO, not LCM) = $12,000/$40,000 = .30

Increase in EI, cost = .30($11,440) = $3,432

EI, cost = $800 + $3,432= $4,232