 Hello and welcome to this session in which we would look at an example that deals with dollar value LIFO. Dollar value LIFO is used when the company uses LIFO last and first out because of the new layers that we are adding and there's inflation involved we have to factor out the inflation in order to figure out the true new layer. Now I did explain dollar value LIFO in the prior session so if you're interested go to the prior session and look at the detailed explanation in this session I will work an exercise going over dollar value LIFO from 20x3 to 20x7. Now I will explain the concept as I'm going through this exercise but if you want just the explanation please go to the prior session starting with 20x3. We have ending inventory based on year end pricing which is this column here and we have the price index the price index which is some measure of inflation and for the first year it happens to be for us 20x3 we assume the price index is 100 or there's this is our base here we're starting from this point. So for the first year it's going to be pretty easy for the dollar value LIFO for year one is 70,000 times 100% or the index 100 or 0.1 or 1.0 it doesn't matter how you look at it for the first year it's going to be the same because the base year is is the year that we started with so that's that. Now let's take a look at 20x4 the first thing I want you to notice is this 20x4 inventory went from 70,000 to 90,300 now if we look if we compute just the raw figures the pricing based on year end pricing we find out there was an increase in inventory of 20,300 well we really can't say that because this number the 90,300 includes inflationary figures so what do we have to do first the first thing we have to do is deflate this number what do I mean by deflate this number we have 90,300 inflation went up went up technically by 5% went to 1.05 or 105 so the first thing we have to do is to deflate this number so let's go ahead and deflate this number so we're going to do first so we ignore the 20,300 because this number include inflationary figures so the to deflate the 90,300 will take 90,300 divided by the price index so we'll take 90,300 divided by the price index and that's going to give us this number here 18,600 86,000 now once we know this is 86,000 now we can compare this is basically the deflated figure now we can compare this number to this number now those two numbers are comparable we can compare them and what do we notice we notice that the true inventory went up by the difference between those two and what's the difference between those two do we have a new layer of 16,000 so this is the true increase in inventory without factoring the inflation now we cannot ignore the inflation we have to take this figure the 16,000 then reinflate it again at 1.05 why because this figure this is the new layer this is the this is the this is the amount that we purchased during that year that we experience inflation of 5% well what we do now is our dollar value life was the 70,000 because we still have that 70,000 it has to be based on the inflation based on the figures then we're going to take the 16,000 and inflate it by 1.05 and it's going to become 16,800 so what we did is we after we figure out the new layer we took the new layer and we inflate it at 1.05 so first we deflated all of the inventory to figure out what's the new layer then we'll take the new layer which is 16,000 and inflate the new layer therefore our dollar value life for 20x4 is 86,800 we're done with 20x4 let's look at 20x5 well again if we take the difference between 95,000 and 120 let's do that which is it's not needed but I want you I want to do this just to show you what's going to happen here minus 90,300 we see from a raw numbers the inventory went up by 4,820 well we should ignore this number just we ignore that 20,300 the first thing we have to do is to deflate our inventory so we'll take the inventory based on year pricing divided by inflation 1.16 and let's see what that number is divided by 1.16 and that's 82,000 whoa whoa whoa this is the deflated figure if we compare this to the base what we started with well guess what the base was 86 from the prior year the deflated amount went from 86 to 82 what does that mean it means for 20x5 we went down by 4,000 based on based figure why well because we did not buy new inventory and all that increase of 4,820 has to do with inflation if anything our inventory actual inventory compared to the prior year compared to the deflated figures went down by 4,000 so we don't have a new layer for 20x5 so how do we do this well basically we eroded a layer that's what happened let's see how we do this and by the way what is the adjustment before we do 20x5 what is the adjustment well what you have to do is you have to prepare an adjustment for to reflect your inventory under dollar value lifehold and the adjustment is this you compare the 86,800 the dollar value lifehold 20x4 to what you are reporting in 20x4 which is 90,300 you compare those two and you have to write down your inventory the difference between them is 3,500 therefore when you write down inventory you debit cost of goods sold you don't credit inventory you credit a contra account called allowance to reduce inventory so that's the entry to adjust your inventory I know this is most likely they will not ask you for it but I just wanted to add it now let's go back to 20x5 20x5 we said based on raw number inventory went up by 4,820 that's not true and we don't need we don't need this number after we deflated 20x5 we find out it's 82,000 and when we compare 82,000 to the prior year base which is 86 deflated 04 we noticed that inventory went down by 4,000 so we don't have a new layer we don't have there's no new layer for 20x5 if anything if anything our old layer you remember we had a layer of 16,000 this layer here now will have to be reduced by 4,000 okay let's do that so our our dollar value lipo for 20x5 is the 70,000 that's true then the old layer from 20x4 if you remember 20x4 was 16,000 now we have to reduce it by 4,000 what's left is 12 then we have to go back and reinflate that 12 at 1.05 we reflate the 12 because this 12 belongs to 20x4 and in 20x4 inflation was 1.05 so 12,000 1.05 will give us 12,600 so notice no x5 layer because in 20x5 we did not have a new layer we did not buy inventory actually we sold some of the inventory from 20x4 let's now take a look at 20x6 20 it's best to have this excel sheet you know on farhat lectures you can download this excel sheet if you're interested in it now for 20x4 again we'll do the same thing but it's useless to compare 95 100 to 105 it doesn't matter whatever that increase as you ignore it the first thing you do is you take 20x6 and you deflate 20x6 to find out how much is the deflated 20x6 figure so the inflation was 20% divided by 1.2 it's 88,000 now what happened 88,000 now we have to compare this deflated amount to the amount from the prior year the deflated amount from 20x5 i deleted it but i have it here so let's go back to deflated x5 so this is the deflated x6 figure 88,000 and the prior year deflated x5 was 82 well guess what now we put a new layer we added a new layer went from 82 to 86 now i'm sorry from 82 to 88 we added a new layer a $6,000 new layer now we have a new layer okay then we have a new layer what do we have to do with this new layer that this new layer will have to re-inflate it or subject to inflation of 1.2 therefore our dollar value life for 20x6 is the 70,000 the 12,600 from the prior year then we'll take the 6,000 and re-inflate it at 1.2 7,200 but remember now just make sure that 20x4 layer is 12,000 i just want you to be aware of that let's take a look from 20x6 to 20x7 from 20x6 to 20x7 something unusual happened even even based on year-end pricing our inventory went down just by year-end pricing so let alone when we factor inflation the order have to do first factor inflation so find the deflated 20x7 figure therefore we'll take 100,000 divided by 1.25 and that's equal to 80,000 so notice our base year the prior year deflated amount was 88 now it went down to 80 what does that mean there's no new layer for 20x7 we did not buy new inventory if anything we sold layers life for lost and first out now we're gonna go back and remove 8,000 from the old layers so which old layers are we gonna be working with the first old layer will be the prior year was life for lost and first out therefore we're gonna wipe out this layer so this layer is gone so the 20x6 layer is gone because we have 8,000 so if we if we used up 6 for 20x6 we still have 2,000 we go we have to go back to the prior layer which is 20x we don't have x5 x5 we did not have a new layer so we have to go back to 20x4 and we had 10,000 and of that 10,000 we're gonna deflate another not deflate remove another 2 what's happened is we have 10,000 left so all we have to do all what we have now is the 20x4 layer of 10,000 and the original 20x3 layer at 70,000 this layer of you know the 70,000 right here so 20x3 and 10,000 from 20x4 because 20x5 no new layer 20x6 layer that 6,000 is wiped out so what's left is 70,000 from 20x3 and 10,000 from 20x4 but that amount is subject to 1.05 which will give us 10,500 20x6 is gone again 20x5 no layer and 20x7 no layer so dollar value life for 20x7 is 80,500 so I hope this exercise help you understand the changes in inventory and help you understand how we compute this using dollar value life what should you do now far hat lectures where you have additional lectures multiple choice through false that's going to help you understand this topic don't take any chances dollar value life was important good luck study hard and of course stay safe