LIFO dual index method.The IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws. Industry Specialization Program has just released a position paper that holds that taxpayers using a dual index method should not estimate earliest acquisitions cost under the last-in, first-out last-in, first-out n. A method of inventory accounting in which the most recently acquired items are assumed to have been the first sold. In a period of rising prices, this method yields a lower ending inventory, a higher cost of goods sold, a lower (LIFO (Last In-First Out) A queueing method in which the next item to be retrieved is the item most recently placed in the queue. Contrast with FIFO. LIFO - stack ) inventory method. The following discussion shows how to identify a dual index method, and determine whether the method is subject to IRS attack. The dual index method is designed to help a taxpayer simplify a LIFO inventory calculation. Example 1 on pages 200-201 of a LIFO calculation shows how a dual index method works. The IRS position paper holds that taxpayers using a dual index method should not estimate earliest acquisitions cost in steps 6 and 7 of the dual index method calculation. For example, the Service would object to the use of the prior year's cumulative deflator Deflator A statistical factor used to convert current dollar purchasing power into inflation-adjusted purchasing power. Enables the comparison of prices while accounting for inflation in two different time periods. index as the current year's cumulative inflator in·flate v. in·flat·ed, in·flat·ing, in·flates v.tr. 1. To fill (something) with air or gas so as to make it swell. 2. a. index, since this assumes there was no inflation at the beginning of 1996. In addition, the IRS objects to a method that computes the current year inflator index based on inventory turns. Example 2: The inventory turnover of Company A, from Example 1, is four times a year. In this case, the Service feels that A should not compute its current year inflator index as follows: Current year deflator index - 1.00 Total current year inflation [divided by] Inventory turns Earliest acquisition inflation + 1.00 Current year inflator index 1.100 - 1.000 0.100 [divided by] 4 0.025 + 1.000 1.025 There is an easy way to identify a dual index method without getting into the details of the LIFO calculation. Most LIFO calculations are summarized in the following format:
Cost of ending inventory $33.00
Deflator index 1.10
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Base cost of ending inventory 30.00
Base cost of beginning inventory 15.00
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Base cost of increment 15.00
Inflator index 1.00
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Current year cost of increment $15.00
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Look for the index used to deflate (file format, compression) deflate - A compression standard derived from LZ77; it is reportedly used in zip, gzip, PKZIP, and png, among others. Unlike LZW, deflate compression does not use patented compression algorithms. the inventory to its base cost and the index used to inflate inflate - deflate the increment to its current year cost. If these two indexes are not the same, the company is probably using a dual index method. |
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