Question

Richardson Company cans a variety of vegetable-type soups. Recently, the company decided to value its inventories using dollar-value LIFO pools. The clerk who accounts for inventories does not understand how to value the inventory pools using this new method, so, as a private consultant, you have been asked to teach him how this new method works.

He has provided you with the following information about purchases made over a 6-year period.

Date		Ending Inventory (End-of-Year Prices)				Price Index
Dec. 31, 2016			$80,000			100
Dec. 31, 2017			111,300			105
Dec. 31, 2018			108,000			120
Dec. 31, 2019			128,700			130
Dec. 31, 2020			147,000			140
Dec. 31, 2021			174,000			145

You have already explained to him how this inventory method is maintained, but he would feel better about it if you were to leave him detailed instructions explaining how these calculations are done and why he needs to put all inventories at a base-year value.

Using your computation schedules as your illustration, write a step-by-step set of instructions explaining how the calculations are done. Begin your explanation by briefly explaining the theory behind this inventory method, including the purpose of putting all amounts into base-year price levels.

Answer 1