After submitting your report on earnings management, you find that Lopez agrees

Question

After submitting your report on earnings management, you find that Lopez agrees with your position. She asks how the company might ensure that it can minimize LIFO liquidations in the future. As the discussion continues, you realize that the best option for the company is to change to dollar-value LIFO to minimize LIFO liquidations. You decide to research this tonight as well and make a recommendation to the management team at tomorrow’s meeting. Prepare a report on dollar-value LIFO, explaining how it might minimize LIFO liquidations

Explanation / Answer

The companies that maintain a large number of products and expect significant changes in their product mix in future, frequently use dollar-value LIFO technique. The use of traditional LIFO approaches is common among companies that have a few items and expect very little change in their product mix.

The real dollar quantity increase in inventory valued at year-end-prices is usually known as dollar-value LIFO layer (or layer). If this layer is added to the beginning inventory of the year , we would get the total inventory at the end of the year.

LIFO liquidation occurs when a company, using LIFO inventory valuation method, sells (or issues) the old stock of merchandise (or raw materials) inventory. In other words, it occurs when a company using LIFO method sells (or issues) more than it purchases.LIFO liquidation causes distortion in net operating income and may become a reason of higher tax bill in current period. When LIFO inventory is liquidated, the old costs are matched with the current revenues and as a result, financial statements show higher income. The LIFO liquidation, therefore, causes a higher tax liability in periods of high inflation.

To minimizes LIFO liquidation dollar-value LIFO method is used , because all items you purchase throughout the year belong to the same inventory pool. The only time you liquidate a pool is when the year's ending inventory is less than beginning inventory after correcting for inflation.DVL pools by year, not unit, so you don't create new pools when you replace units with different ones. By maintaining the older layers, you match your COGS to the most recent purchase prices, which is the whole point of LIFO.

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