- 10 -
Regs.7
7 Consider the following example of the dollar-value
method, based on Gertzman par. 7.04[3], at 7-37.
Assume that T (a manufacturer) began operations a number of
years ago with 4 pounds of item A that cost $0.10 a pound. Its
total inventory was thus valued at $0.40. Normal operations
require the taxpayer to purchase and consume 4 pounds of A each
year. The LIFO value of its closing inventory would, thus, have
remained $0.40 notwithstanding that the cost of A increased to
$0.50 a pound in the interim. Assume further, that, because of
technical advantages, an equal quantity of item B may now be used
in lieu of item A. The current price of B is $0.40 a pound, and,
because of the price advantage of B over A ($0.10), T, this year,
purchases 4 pounds of B and consumes its remaining stock of A.
Like A, B has a base-year cost of $0.10. Under those facts, if T
follows the dollar-value method with a single inventory pool that
includes both items A and B, its cost of goods sold and ending
inventory will be as follows:
Quantitative change in base-year cost of inventory:
Beginning inventory at base-year cost
(4 pounds of A at $0.10) $0.40
(0 pounds of B at $0.10) 0.00
0.40
Ending inventory at base-year cost
(0 pounds of A at $0.10) 0.00
(4 pounds of B at $0.10) 0.40
0.40
Increase in inventory cost 0.00
LIFO value of inventory:
Beginning inventory 0.40
Ending inventory 0.40
Cost of goods sold:
Beginning inventory 0.40
Purchases (4 pounds of B at $0.40/lb) 1.60
2.00
Less: Ending inventory 0.40
Cost of goods sold 1.60
(continued...)
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Last modified: May 25, 2011