Inventory Estimation Using Dollar-Value LIFO Retail Method

How can we estimate inventory using the Dollar-Value LIFO retail method?

Assume that on 1/1/2024, Toso adopted the Dollar-Value LIFO retail inventory method and that the retail price index at the end of 2024 is 1.02.

Estimating Inventory with Dollar-Value LIFO Method

To estimate inventory using the Dollar-Value LIFO retail method, we need to consider the retail price index provided. In this case, the retail price index at the end of 2024 is 1.02.

The student's question deals with the estimation of year-end inventory using the Dollar-Value LIFO retail inventory method against a retail price index rise. While specific inventory figures are needed to calculate the estimated inventory, the inflation rate can be computed using the percentage change formula based on index numbers.

The student's question pertains to the calculation of inventory using the Dollar-Value LIFO retail inventory method and how to estimate the inventory at the year end considering a retail price index increase. Since the student is provided with a retail price index of 1.02 at the end of 2024, we would typically adjust the cost of the inventory at the beginning of the year by this index factor to account for inflation when using the Dollar-Value LIFO method. However, without the actual inventory values at the beginning or throughout the year, we cannot calculate the estimated inventory. To do so, one would multiply the beginning inventory by the index to arrive at the end inventory value.

Nonetheless, it's important to remember that the essence of the Dollar-Value LIFO method is to layer inventory costs based on price indexes over time, to match current costs with current revenues and thereby provide a way to combat the effects of inflation in the inventory valuation process.

To calculate the inflation rate from period 1 to period 2 using the percentage change formula, you can apply the formula:

(Current Price Index - Previous Price Index) / Previous Price Index

Applying the given index values, you would use the change in the index number (e.g., from 93.4 to 99.5) over the previous index number (e.g., 93.4) to find the percentage change, which represents the inflation rate. The inflation rate would then be calculated as:

(99.5 - 93.4) / 93.4 = 0.065 = 6.5%

This calculation shows how historical costs can be updated to reflect current purchasing power, which is critical in a retail environment for sustaining profit margins throughout periods of inflation.