LIFO Valuation: Example
The graphic shows an example of annual LIFO valuation.
(*) You can calculate the value of a layer in various ways: For more information, see Determining the Layer Value: Example . In the example, the values for the 1998 layer are calculated using the moving average price of the goods receipts:
Layer quantity x total value of goods received / total quantity of goods received
Material with an Increase in Stock
For the year 1998, the year-end stock balance exceeds the year's initial stock balance by 50 pieces. Thus, when LIFO valuation is carried out at the end of 1998, a layer is created for 1998 with a quantity of 50 pieces. In this example, the value of the layer is calculated using the average price of the goods receipts:
Total receipt quantities for 1998 |
100 pieces + 30 pieces = 130 pieces |
Total receipt values for 1998 |
100 pieces x $1.10/piece +30 pieces x $1.20/piece = $146 |
Process |
50 pieces x $146/130 pieces = $56.15 |
Material with a Reduction in Stock
No new layer is created when LIFO valuation is carried out at the end of 1999, since there were more goods issues than receipts. Instead, the 1998 layer is reduced by 30 pieces to 20 pieces, and the value is reduced proportionally:
20 pieces/50 pieces x $56.15 = $22.46
The above graphic shows that if you carry out LIFO valuation when prices are increasing, this leads to a lower value than if you valuate stocks using the moving average price.