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Under the dollar-value method, once items have been grouped
into pools, the next step is to determine whether there has been
any change in the quantity of dollars invested in the pools over
the year. See Gertzman par. 7.04[3][b], at 7-44. Those changes
are determined by comparing the aggregate base-year cost of the
items in a pool at the beginning of the year to the aggregate
base-year cost of the items in the pool at the end of the year.
See id. par. 7.04[3][b], at 7-44 to 7-45. If the latter exceeds
the former, there has been an increment in the pool; if the
former exceeds the latter, there has been a liquidation of all or
part of the pool. Id. par. 7.04[3][b], at 7-45. The base-year
cost of an item in a pool is the cost of the item (or what would
have been the item’s cost if it had been added to the pool) as of
the base date. See id. “Base date” is the first day of the
first year for which LIFO is adopted. Id. A similar description
7(...continued)
LIFO reserve at end of year:
Replacement cost of ending inventory
(4 pounds of B at $0.40/lb) 1.60
Less: LIFO value of ending inventory 0.40
LIFO reserve 1.20
The dollar-value method allowed T to take full advantage of
the current cost of B in determining its cost of goods sold. By
focusing solely on the change in the dollar value of T’s total
inventory investment, rather than the specific mix of items
constituting that investment, the dollar-value method allowed T
to liquidate its investment in A without incurring a tax on past
inflation. The LIFO reserve measures the potential gain built
into the inventory pool.
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Last modified: May 25, 2011