Question

On January 1, 2016, Avondale Lumber adopted the dollar-value LIFO inventory method. The inventory value for its one inventory pool on this date was $300,000. An internally generated cost index is used to convert ending inventory to base year. Year-end inventories at year-end costs and cost indexes for its one inventory pool were as follows:

Year Ended December 31 Inventory Year-End Costs Cost Index (Relative to Base Year)
2016 $392,080 1.04
2017 $403,920 1.08
2018 458,890 1.09
2019 492,240 1.12
Required:
Calculate inventory amounts at the end of each year.
Date Ending Inventory
12/31/16
12/31/17
12/31/18
12/31/19

Answer 1

Avondale Lumber

Calculation of Inventory amounts at the end of each year:

Date Year-end cost Index Ending Inventory

12/31/16 $392,080 1.04 $377,000 ($392,080/1.04)

12/31/17 $403,920 1.08 $374,000 ($403,920/1.08)

12/31/18 $458,890 1.09 $421,000 ($458,890/1.09)

12/31/19 $492,240 1.12 $439,500 (492,240/1.12)

Step-by-step explanation:

a) To convert a year-end cost to a base year cost, we divide the year-end cost by the index. The application of the index reduces the value of the year-end inventory to the nominal value without removes the seasonal variations due to inflation and other factors. The base year of the index becomes the standard for measuring the other balances. Indexing figures is an important way of standardizing measurable performance indicators by smoothening variations.