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Dollar value LIFO is a technique to estimate inventory on the balance sheet based on physical inventory counts. It is not as used today due to scanning technology, but in the old days, it was hard to keep track of which inventory remained unsold and which inventory was sold. Remember that the value of inventory on the balance sheet is based on cost, not market value (actually lower of cost or market).

Dollar Value LIFO starts with physical inventory. Count the physical inventory and estimate its value based on current wholesale market values. If there was no inflation, this would approximate cost. However, if there is inflation, we need to made additional calculations to estimate what we originally paid for the inventory at cost.

Consider the facts below:

2. What was the rate of inflation in year 2 in percentage terms? (Year 2 index / Year 1 index) 1

2. What was the rate of inflation in year 3?

3. Suppose the inventory from year 1 remained unchanged in year 2 (i.e the company did not purchase nor sell any inventory in year 2), what would be the market value of the inventory by the end of year 2?

4. What was the actual market value of the inventory at the end of year 2? (simple question, from the table)

5. Based on your answers to the previous two questions, how much inventory was added in year 2 (based on cost, show calculations)

6. Based on your answers to the previous question, what is the balance sheet value of the inventory at the end of year 2? Add year 1 inventory ($240,000) to the year 2 layer (at cost, answer 5 above) to get the ending inventory (at cost) for year 2. This is the amount that goes on the balance sheet. Show work.

7. Review the answer and explanation to question 8 copied below regarding the year 3 inventory on balance sheet. Do you now understand the answer? If not, you may ask a SPECIFIC question about the explanation in the solution.

1. What is this inventory calculation method called Dollar-Value?

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