The formulas
- Ending inventory at base prices = ending cost / current index
- If above prior layers: new layer = (increase at base prices) x current index
- LIFO value = base layer + each layer x its index + new layer
- If below prior layers: remove layers from the most recent
How it works
Dollar-value LIFO treats the inventory pool as dollars of purchasing power. Ending cost is deflated to base-year prices with a price index. An increase becomes a new layer priced at the current index. A decrease removes the newest layers first.
This version handles the base layer, one earlier layer and one new year. Real pools with many layers need the full layer table carried forward. Choose and support the index method (for example an external index or double-extension) in your documentation.
Illustrative figures only. Check the result against your firm's methodology before relying on it.
Common questions
What is a liquidation?
When ending inventory at base prices falls below earlier layers, those layers are removed and older, lower costs flow to cost of goods sold.
Where does the index come from?
It is computed by the entity, for example by double-extension or from an external index. Document the method.
Why is LIFO value lower than current cost?
Older layers sit at older, lower prices. The gap is the LIFO reserve.
Formulas on this page are the standard definitions.
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