A firm uses the dollar value LIFO retail method and has $2,000 in beginning inventory at retail at the beginning of the current year. The base year equivalent of this amount is $1,600. The base year index is 1.00. The beginning inventory reported in the Balance Sheet is $800. During the current year, the firm purchased $12,000 of inventory at cost and marked that up to $40,000. Sales for the year were $28,000. The relevant ending price index is 1.60. What amount does this firm report as inventory in its Balance Sheet at the end of the current year?

The firm reports $4,232 as inventory in its balance sheet at the end of the current year.

Explanation:

Given

There are two-steps involved.

The First process involve the Dollar Value LIFO (DV LIFO)

We'll apply this to retail dollars in order to determine the layer added in current-year retail dollars.

After then, well calculate the FIFO Cost to retail (FIFO CR)

This will be needed in order to convert that layer to cost.

Lastly, this layer is added to beginning inventory at cost to yield ending inventory at cost.

EI Retail

Current Index = $2,000 + $40,000 - $28,000 = $14,000

Base = Current Index/Price Index

Base = $14,000/1.6 = $8,750

Increment in EI Retail

Base = $8,750 - $1,600 = $7,150

Current = $7,150 * 1.6 = $11,440

FIFO Begins from here

Cost to Retail (CR) = $12,000/$40,000 = 0.30

Increase in EI Retail

Cost = 0.30 * $11,440 = $3,432

Total = $800 + $3,432 = $4,232