Dow A. and Sandra E. Huffman, et al. - Page 10

                                       - 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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