 and welcome to this session in which we would look at a CPA simulation that deals with dollar value LIFO method. This topic is challenging for many accounting students as well as CPA candidate. Two reasons, one their college did not cover dollar value LIFO or if they covered it they did not do a good job explaining the topics. I'll work this example show you how to use dollar value LIFO but what I want to tell you is I do have detailed explanation about dollar value LIFO on my website farhatlectures.com whether you are an accounting student or a CPA candidate. I strongly suggest you check out my website especially if you are a CPA candidate. I don't replace your CPA course whether you have Becker, Roger, Gleim or Wiley or Sargent or some other course. I can be a useful addition. I can add 10 to 15 points to your CPA exam. Why? Because I can explain the material from scratch. CPA review courses they review the material with you they don't explain the material from scratch that's what I do. I teach as if you never looked at the material before then you can go to your CPA courses and do a great job learn the material more efficiently. Now what I suggest you do if not for anything check out my website to find out how well is your university doing on the CPA exam. This gives you an idea about how rigor is your accounting program because I do have the score over all average and score by section. Also if you're an accounting students as I mentioned I have many accounting courses please connect with me on LinkedIn and check out my LinkedIn recommendation for people who already used my services to pass the CPA exam. Please like this recording share it. If it's helping you it means it might help other people as well connect with me on Facebook and Instagram. Let's go ahead and start to look at this problem. Adam Corporation adopted the dollar value LIFO retail method on January 1st 2021. Now although I'm going to be explaining what dollar value LIFO is but if you go to my website I do have half an hour explanation about this topic okay and I do have more exercises to show you how to solve this so I want to make sure you understand although I may not dig deep into this but I will explain it enough that you can move on but if you want more explanation for head lecturers.com. On that date the cost of inventory on hand was 17 000 that's the cost of inventory and the retail value was 20 000 information for 21 and 22 is as follow they're given us the ending of 2021 retail method the price index cost to retail percentage the date for 12 31 2022 ending retail ending inventory at retail that's important the retail price index or the price index cost to retail percentage. The first thing they're asking us is what is the cost to retail percentage for inventory on hand as of 11 2021 it means the day that we switched from whatever method we are using the dollar value LIFO. Now dollar value LIFO keeps track of inventory by a dollar amount we don't care about the unit what we care about is about the change in the dollar amount but let's first answer this question then we'll go back and explain the numbers a little bit further what is cost to retail every time you hear the word something to something x to y it means take x divided by y so cost to retail for 11 21 cost is 17 000 retail is 20 000 and I just answered the first question cost to retail is 85 percent it means you do have 20 000 worth of material for sale on based on the retail price but your cost of that material is 17 000 simply put if you sell all this material you will make a profit of 3000 but the question is what's the cost to retail percentage the reason we're asking about the cost to retail percentage is because when we report inventory remember when we report inventory we report inventory at cost so we want to know what is the relationship between cost and inventory for your 11 21 inventory well it's 85 percent so whatever retail you have 85 percent of it is the cost and you're going to see how why this is important that's good the second question is calculate the inventory value it means the inventory dollar amount not unit at the end of 2021 2022 using dollar value lipo now we're going to do it one one one year at a time of course we're going to do it one year at a time so let me show you what happened a year later a year later 12 31 2021 you have ending inventory at retail 35 000 so notice what happened let me show you at the beginning of the year you had 20 000 worth of inventory at retail at the end of the year you had a year later you had 35 000 now what does that mean well at face value you would say well i have 15 000 worth of inventory so i have 15 000 worth of inventory well is that really true or not well it's not really 100 true why because this 35 000 is a nominal or inflationary figure and how inflationary it's 1.4 what does that mean it means yes you do have a larger dollar amount in inventory you have 15 000 more but do you have let me let me just kind of let's assume let's assume the number was 40 000 to make it easier for you let's assume the number is 40 000 just so i can explain the concept does this mean you doubled your inventory if you have 20 000 the prior year now you have at the end of the year 40 000 does it mean you doubled your inventory at face value you might say yes i have double inventory does this mean if you had five units now you have 10 units and the answer is no you did not really double your inventory why although it's showing 40 000 but that 40 000 number is inflationary okay so let's go back to our original number so the 35 000 it doesn't mean you have let's assume you just okay let's assume for the sake of simplicity each unit is a dollar and you had 20 000 unit now it's 35 000 unit 30 you have 35 000 dollar does that mean you have 35 000 units and the answer is no and the answer is no why because this number is inflationary so how do we account for this well let's see what we're gonna do we're gonna deflate this number we're gonna deflate the dollar amount because we don't care about the units okay we don't care about the units we care about the dollar amount so how do we compute our ending inventory using this dollar value life well here's what we do let's see starting with the 35 000 we're starting with the 35 000 the first thing we do with the 35 000 let me start it here starting with the 35 000 i told you this number is inflationary because the price index the retail price index everything went up in price by 40 percent okay so part of this 35 000 part of that increase it's not because you have more units it's because overall prices went up think of it this way if i have one one quart of milk in last year it cost five dollars one quart of milk and it's five dollars one gallon now i have one gallon of milk and it's eight dollars okay so if i'm reporting only the dollar amount if i'm reporting why i have five dollars worth of milk now i have eight dollars it doesn't mean i have three dollars worth of milk absolutely not you still have the same one gallon worth of milk except the price went up by three dollars it doesn't mean you have more milk you have the same unit the prices went up and here's what we're saying here so how do we account for this i know i keep repeating myself let's get going what you have to do first is you have to deflate this 35 000 at 1.4 deflate it means bring it back to the base prices and what's the base price the base price is 25 000 if i take 35 000 divided by 1.4 it means a treat the 35 000 as if you are using base here what's the base here base here is year one what is year one when did when did we switch to when did we switch the dollar value life at the beginning of the year so january 1st 2021 is your base here so you have to compare everything to your base here simply put you do have more inventory but the more inventory the actual inventory is only 5 000 not 15 000 because the remaining 10 000 was due to inflation so the first thing you did is you deflated your inventory now how much inventory do you have well i have 20 000 of inventory okay and remember this 20 000 is i have to deflate it it mean deflate it it means bring it well the price i have you multiply it by the price index this is the base this is the base here always the base here is you multiply by 100 percent then remember i have to report the cost only 85 percent of it is cost therefore my inventory is we already kind of we know this is 17 000 now this is for year at the beginning of 20 i'm gonna call this uh since it's since it's 2021 i'm gonna call it 2020 this is year 2020 because it's the beginning of the year 2021 for the year 2021 okay so what do i do for the year 2021 for the year 2021 how much did my inventory increased by my inventory only increased by five thousand dollar remember my inventory increased by five thousand dollar now i'm gonna multiply this five thousand dollar this five thousand dollar increase in inventory i have to reflate it so this is subject to inflation because i purchased it this year it's reinflated at 1.4 percent then i'm gonna multiply this amount by cost cost to retail because remember cost to retail so this 5000 multiplied by 1.4 this is my retail i want to know how much of it is cost and they're giving me the ratio for 2021 the cost to retail is 0.87 87 percent of it is really cost therefore how much inventory do i have is 4094 for year 2021 based on dollar value life oh therefore what's my total inventory my total inventory is i'm sorry six thousand ninety not four thousand six thousand ninety therefore my total inventory is 23 thousand and ninety dollars one more time the inventory from year one from the base year is 17 thousand for year 2021 i only added five thousand dollar of new inventory based based on the base year prices then i have to reflate this by 1.4 again this is retail then i have to find the cost the cost is 0.87 to find my cost therefore my inventory as of 2021 is 23 thousand and ninety dollars let's look at my inventory for 2022 my inventory for 2022 it's showing that i have 49 000 worth of inventory at retail do i really have that much inventory i'm increasing my inventory a lot not really why because notice the price index of retail is 1.75 the prices are almost doubling for everything you know two is double like 1.75 is really large there was a large increase in the prices of my inventory i'm buying stuff that's really inflationary so what do i need to do well first i need to deflate the prices so i'm going to take 49 000 first you deflate it at 1.75 so the inventory based on based on base year prices it's only 28 000 what does that mean it means from the prior year to this year you went up only through inventory of 3000 so the change in inventory is only 3000 based on base prices but remember you have to reflate this therefore for year 2022 you have an increase in inventory the new layer is 3000 only 3000 but remember you have to inflate this only you only inflate the new inventory because this is what you added this year at 1.75 percent and remember this is your retail price you have to convert it to cost cost to retail is 0.9 therefore i should put this a little bit lower 3000 dollar this is year 2022 year 2022 3000 times 1.75 and this amount will have to be multiplied by 0.9 to find the cost which will give us 4725 now i'm going to add this 4725 to my prior numbers in my inventory at at at dollar value lifo is 27 815 so this is my inventory for year 2022 and this was my inventory for year 2021 so this is how you compute the inventory value using dollar value lifo now if you want a detailed explanation of what i just did i'm going to summarize it real quick in less than a minute then i'm going to tell you what you need to do again these prices you know my inventory at retail went from 20 to 35 wow that's a lot of new inventory not really it's because of the price index so i deflate my inventory my 35 000 to make it comparable to the beginning of the year which is it it could became 25 000 it means i only increase my inventory by five so this is the new inventory that's subject to inflation then you multiply it by the cost to retail because you want to report your inventory at cost then 2022 my inventory went from 35 to 49 my inventory is increasing not really it's because of inflation you deflate that number you find your in your true increase in inventory your true increase in inventory is 3000 you multiply it by that inflation figure the only amount that's subject to 1.75 is the 3000 then you multiply this retail number by 0.9 to come up to your cost to true cost again if you want more explanation about this topic i strongly suggest you visit my website farhatlectures.com once again i'm gonna tell you i don't replace your cpa prep courses i just i simply can do can do so if i can do so i will charge you more than this amount okay rest assured i can charge you more if i can replace this i don't but i can be a very useful addition to your cpa course i can help you understand the material so when the cp cpa course reviews it with you you will do very well so i can be the supplement the vitamin for your cpa and remember your cpa is a lifetime investment whatever you do now the next two years it's gonna pay dividend for the next 30 to 40 years so don't shortchange yourself and here's my challenge to you what's my challenge you're gonna be risking 30 for the first month to find out whether my lectures whether my website can help you improve your grade are you willing to take that chance 30 if you don't like it you can cancel you would lose 30 that's your maximum loss now what's your profit what's your benefit it's potentially unlimited if you pass your exam and you move on are you willing to take that risk that's my question to you anyhow stay safe of course good luck and study hard for your cpa exam