Pooled LIFO | California State University, Northridge - Edubirdie

University:
California State University, Northridge
Course:
ECON 160 | Principles of Microeconomics
Academic year:

2024
Views:

428

Pages:

1
Author:

Daneshfarnjp

One of the problems with using the LIFO cos�low assump�on is the problem of "involuntary LIFO liquidation". One cause of this is if the unit LIFO method is used and the inventory is not replenished because a change in product mix occurs (for example, the company sells less oil based paint and more latex paint). If the inventory has been kept on a unit LIFO basis, eventually, the en�re beginning inventory (of oil paint) will have been sold, resul�ng in lower cost of goods sold and higher taxes. One method to avaid this problem is to use a "pooled LIFO" approach. Under this method, similar goods are grouped into "pools" and the individual components of the pool (and the change in composi�on of the pool) are ignored. The focus is en�rely on the total dollar value of the pool. Using this approach helps to reduce the problem of involuntary LIFO liquida�on, but it requires constant update and vigilance. It may also cause charges of income manipula�on. To eliminate the problems caused by suing pools, the dollar value LIFO approach was developed.

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