 Hello and welcome to the session in which you would look at dollar value life. Oh, it's very important to distinguish dollar value life Oh from traditional life. Oh traditional life Oh is what we learned in prior session where we keep track of inventory per unit separately And for a lot of companies they have many many units thousands if not hundreds of thousands of small units So it's very expensive to keep track of inventory per unit It's time-consuming and it could be subject to life of liquidation because you are eroding Old layers. So the old layers are there and you're identifying them specifically the dollar value life Oh is a little bit different. It's simpler. Although you might think it's a little bit more challenging for us Hopefully I can simplify it, but it creates pools the dollar quantity of inventory inventory rather than keeping per unit So under the traditional traditional life. Oh, we keep track of everything in unit, which is time-consuming Under dollar value life. Oh, we're gonna group Stuff together inventory together and keep track of it in dollar amount Specifically item that's that faces the same price changes In other words, they go up and down and prices in the same way or they go up and down and they cancel each other That somehow it makes sense to put them together. For example, flat screen TV Smart TVs DVDs they all electronics. So they work the same way from year to year So the purpose of dollar value life. Oh is to reduce life. Oh liquidation It reduce it not eliminated. You eliminated. You could still be subject to a little bit of erosion But you would reduce it and you would reduce clerical cost to keep track Clerical cost errors to keep track of each unit separately The best way to illustrate this concept is to actually look at an example before we look at an example I just want to let you know that whether you are an accounting student or a CPA candidate to take a look at my website farhatlectures.com I don't replace your CPA review course or your accounting course. I'm a useful addition to your CPA review course I'm a useful addition to your accounting course. I explain the material differently I offer you additional resources Additional explanation the theory behind the concept your risk is one month of subscription. Give me a try If you like it, you keep it if it's here. Let's help in you. You will know the difference If not, that's fine Then it doesn't you it doesn't work for you If not for anything take a look at my website to find out how well or not while you're university doing on the CPA exam I do have resources for other college courses You can take a look at them here advanced accounting, managerial accounting, auditing, so on and so forth My CPA materials are aligned with your Becker, Roger, Gleam, Wiley, Ratsurgent, so on and so forth and I do give you access to all the AI CPA Previously released questions 1,500 of them with detailed solution If you have not connected with me on LinkedIn, please do so take a look at my LinkedIn recommendation Like this recording share it with other connect with me on Instagram, Facebook, Twitter and Reddit The way we convert inventory to Dollar value LIFO is through a three-step process. It's very important to understand those three-step process and what I mean understand means Absorb what you are doing you can memorize the steps But if you absorb if you understand it it makes it makes it much easier to recall Step one, we're going to deflate ending inventory to current prices using a conversion index Okay, so we're going to be giving you might be giving FIFO And you'll be told to convert to dollar value LIFO So first thing you do is you deflate ending inventory to current prices using conversion rate You're then you're going to compute the difference and the difference will be the layer of ending inventory either created or sometimes eroded your inventory might go down And you're going to take this layer and you're going to reinflate this layer Using the cost index in the year acquired very important the cost index of the year acquired I'm going to look at a introductory example here. So listen to me carefully I'm going to look at an introductory example here in the next session You're going to have a more advanced example So first learn the basics then learn how to do the advanced example Let's take a look at this example. Adam company was using dollar value life formatted on january 1st x1 when the inventory cost was 400,000 December 31st x1, which is the end of the year the inventory was 455,800 and the cost index for the year was 1.06 or 106 percent Okay, let's go through this through this process now. We need to know what is our dollar value life form first step Let's look deflate ending inventory using conversion index the the conversion, which is the inflation rate Well, let's do that. How do you do this you deflate? We're going to take 455,800 current prices divided to take out the inventory And now we're going to come up to 430,000 What does that mean? It means the true increase if we factor the inventory out is from 400 to 430 So there was an increase of 30,000 of new inventory That's so we factor out the inventory from the total figure. That's step one. So we're done with step one Step two find the difference in the layers. Let's see if we added a layer or if we eroded a layer Obviously, I just told you we added a layer of 30,000 Therefore what we did in step two we step two basically saying you started with 400,000 you added the layer Now your inventory at base year compared to base year you had 430,000 So if we're comparing base prices Base prices to base prices between year one the beginning of year one till the end of year one. Okay. This is 2001 which is December 31st So comparing the beginning one one Or 20x1 to 1231 20x1. We're talking about a 30,000 layer. So this is step two done with step two So we added a layer Sometimes the layer might be eroded and this is what I will do in the next session when you would look at the example Then what we look at now, we're going to reinflate each layer using the cost index in the year Acquired this very important. So let's take a look at the first layer. The first layer is the 400,000 which is 11 20x1 what's the price index always year one because it's your base year. It will be 100% or just one So ending inventory will be 400,000 for 11 20x1 The second layer i'm going to reinflate remember I added 30,000 of base dollar, but I had a 6% inflation Now i'm going to reinflate this 30,000. It's going to be inflated and i'm going to multiply it by 1.06 And that's going to give me 31,800. Now. I know my dollar value lipo is 400 31,800 So this is my dollar value lipo now what I need to do. I need to make a journal entry To reconcile between my dollar value lipo and my fifo. Okay, if I'm if I was using fifo What do I need to do? Well my fifo the method that I was using Was 455,800 therefore I need to reduce my inventory to this much I'm going to create an allowance account and I'm going to reduce my inventory therefore my cost of goods sold Will go up by the difference of 24,000. There's a difference of 24,000 And I will credit allowance to reduce inventory, which is a contra Asset it means this is going to stay with you from year to year In the next session when I go from year to year, I'm going to keep track of this account So this is again a balance sheet account. It means it's a permanent account It means you have to account for it from year to year So this is the entry that you make To to come up to dollar value life or you reduce your inventory and you increase your cost of goods sold Now let's talk about the conversion index Or the consumer price index. Well the conversion index the consumer price index the inflation index Whatever you want to use Most companies uses the one that's provided by the government, which is called the consumer price index It which is cpi and you know company can use this Um companies can use more specific Price index for example, if your industry is very specialized, for example, oil prices changes differently than electronics electronics They may deflate from year to year. They may not have inflation They you know electronics equipment they get cheaper because to produce them Companies are more and more efficient because of advancement and technology versus oil Or the company can compute their own internal price index And if you want to compute your own internal price index, what you will do is you will take your ending inventory at current prices And you will divide your ending inventory at current prices by the same inventory that Compared to the prior year base at cost simply put let's assume last year something cost you $9,000 Okay, now this year the same items the same exact item are costing you let's assume 10,600 so what you do is you will take 10,600 divided by 9,000 That's 1.177 that's rounded 1.18 So it's approximately you're talking about an increase in prices of 18% So what you did is you computed your own your own price index your own consumer price index It's your own internal one So you want to make sure you understand how to compute this because on the CPA exam What in your courses you might be expected to compute the consumer price index take your ending inventory at current cost divided by the prior year based cost and If it's most likely it's an increase especially these days if you think about what's going on in the economy now We're experiencing inflation Companies will have to make sure they're using the proper consumer price index actually The consumer price index this last week grows the most since year 1990 Okay, this is I believe went up to 6.2 percent Which is quite high quite high relative to the recent history anyhow Make sure in the next recording you would look at the example where I work a comprehensive where prices Where prices where we have an erosion Okay in the in the layers for dollar value life At the end of this recording I'm going to ask you again to take a look at my website farhat lecturers.com. 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