1. Dollar Value LIFO INTERMEDIATE ACCOUNTING I CHAPTER 8

2. Recognition Depends on the earnings process; for most credit sales, revenue and the related receivables are recognized at the point of delivery. Initial valuation Initially recorded at the exchange price agreed upon by the buyer and seller. Subsequent valuation Initial valuation reduced to net realizable value by: 1. Allowance for sales returns 2. Allowance for uncollectible accounts: - The income statement approach - The balance sheet approach ClassificationAlmost always classified as a current asset. Measuring and Reporting Accounts Receivable

3. Dollar-Value LIFO (DVL)  Inventory is viewed as a quantity of value instead of a physical quantity of goods.  The DVL inventory pool is viewed as comprising layers of dollar value from different years.  An inventory pool is identified in terms of economic similarity rather than physical similarity (subject to the same cost change pressures).  DVL simplifies the recordkeeping procedures because no information is needed about unit flows.  DVL minimizes the probability of the liquidation of LIFO inventory layers, through the aggregation of many types of inventory into larger pools.

4.  Under unit LIFO we determine whether a new LIFO layer was added by comparing the ending quantity with the beginning quantity.  Under DVL we determine whether a new LIFO layer was added by comparing the ending dollar amount with the beginning dollar amount.  Under DVL, if the cost level has changed, we need a way to determine whether an increase observed is a real increase or one caused by an increase in costs.  So before we compare the beginning and ending inventory amounts, we need to deflate the ending inventory amount by any increase in costs so that both the beginning and ending amounts are based on the same level of costs.  We accomplish this by using cost indexes. A cost index for a particular layer year is determined as follows: Cost Index in Layer Year = Cost in Layer Year Cost in Base Year The cost index for the base year (the year DVL is initially adopted) is set at 100. COST INDEXES

5. DVL ILLUSTRATION Hanes Company adopted the dollar-value LIFO method on January 1, 2013, when the inventory value was $400,000. The 2013 ending inventory valued at year-end costs is $441,000, and the cost index for the year is 105. Step 1: Convert ending inventory valued at year-end cost to base year cost. Ending inventory at base year cost = $441,000 ------------------= $420,000 1.05

6. Step 2: Identify the layers of ending inventory. $420,000 Ending inventory at base year cost 400,000 Beginning inventory, also at base year cost $ 20,000 Real increase in inventory quantity (new layer) DVL ILLUSTRATION (continued)

7. Step 3:Convert each layer’s base year cost to layer year cost using the cost index for the year it was acquired. Ending InventoryCost Ending Inventory Date at Base Year Cost xIndex = at DVL Cost 1/1/13$400,0001.00$400,000 12/31/13 20,0001.05 21,000 Totals$420,000$421,000 DVL ILLUSTRATION (continued)

8. Dollar Value LIFO INTERMEDIATE ACCOUNTING I - CHAPTER 8 END OF PRESENTATION