Product LIFO Valuation Master List Report overview

LIFO is a dollar-based valuation as opposed to FIFO (first-in, first-out), which is an inventory-based valuation. The LIFO method measures inventory changes from the beginning to the end of the year, in terms of equivalent dollars. Therefore, the net dollar change can be identified. The dollar-based valuation allows many products to be included in a particular LIFO category. SA Table Code Value Setup is used for the initial setup of LIFO category definitions. Product Extended Last-In-First-Out Valuation Setup is used to provide a more detailed setup for LIFO categories.

The LIFO category must also be specified on the individual Product Setup records. Individual products must be included in a LIFO category if you prefer to value your inventory by LIFO. The Product LIFO Valuation Master List Report can be run for a single LIFO category, or a range of categories.

When you run the Product LIFO Valuation Master List Report at the end of the year, these calculations are applied:

1. The base year valuation is calculated first.
   • The product's on hand + unavailable + received = the beginning inventory
   Note: The cost refers to the choice selected in the Post to GL By option in SA Administrator Options-Products-Costs. The cost may or may not include addons.
   When a base year record is created, the LIFO base year field in Product Warehouse Product Setup-Costs is updated. If a product is set up with special costing in Product Setup, the cost from the special costing unit is converted to stocking units.

   • Beginning inventory * AO-Products-Costs = base year valuation
   This table shows a simplified example of your inventory quantities and prices increasing on a yearly basis. It compares your base year valuation to your LIFO valuation and shows the gross amount your inventory will increase.

   Table 1. January 1, 2019

   	Quantity	Base Cost	Total
   Product 1	25,000	$2.00	$50,000
   Product 2	30,000	$2.50	$75,000
   Product 3	10,000	$1.50	$15,000
   Total Cost (LIFO=FIFO) $140,000

   Note: At this point in time, LIFO and FIFO are the same.
2. The index is calculated next.
   • Current cost extension/base cost extension
   Note: The quantity at year end is extended by the base cost and the current cost. The index is calculated by dividing the current cost extension by the base cost extension.
   The index is used on the Product LIFO Valuation Master List Report to multiply against the base valuation of inventory in order to calculate the LIFO value.

   Table 2. December 31, 2019

   	Year End Quantity	Base Cost	Extended Value	Current Cost	Extended Value
   Product 1	29,500	$2.00	$59,000	$2.20	$64,900
   Product 2	40,000	$2.50	$100,000	$2.75	$110,000
   Product 3	10,500	$1.50	$15,750	$1.60	$16,800
   Index: $191,700/$174,750 = 109.70

3. The LIFO Valuation is then calculated for each year you have tracked LIFO.
   The difference between the LIFO value total and inventory at current cost is the LIFO reserve.

   LIFO Inventory	Base Cost	Index	LIFO Value
   January 1, 2006, Base Year	$140,000 (1)	100.00%	$140,000 (1)
   2006 Layer	$34,750	109.70%	$38,120
   Total	$174,750 (2)		$178,120
   Inventory at Current Cost (FIFO equivalent)			$191,700 (3)
   LIFO Reserve (Current Year Benefit)			$13,580
   LIFO Reserve at 1/1/00			$13,580

   The layer represents the incremental layer of inventory added in this year.

   • On Hand + Unavailable + Received

   These quantities are taken from Product Warehouse Product Setup-Costs. If the quantity at year end from the current year is greater than last year, the difference is added to the layer for the current year. If the current year decreases from last year, the difference will be dipped from the layer from last year (and possibly additional previous years).

   The previous example illustrates the first-year benefit of using LIFO. The value of the inventory at year-end under LIFO is $13,580 less than the value computed by the FIFO method. This difference can be charged to the cost of goods sold, and your taxable income is reduced accordingly.

   The difference between the LIFO value total and inventory at current cost is the LIFO reserve for 2019.

4. Calculate the benefit.
   At the end of the second year, inventory levels do not increase in terms of base-year dollars, because the quantity decreased from 2019 to 2020 and part of the 2019 layer was liquidated. However, because of rapidly increasing costs, a significant tax savings can still be realized.

   Table 3. December 31, 2020

   	Year End Quantity	Base Cost	Extended Value	Current Cost	Extended Value
   Product 1	30,000	$2.00	$60,000	$3.00	$90,000
   Product 2	29,000	$2.50	$72,500	$3.50	$101,500
   Product 3	12,000	$1.50	$18,000	$1.90	$22,800
   			$150,500		$214,300
   Index: $214,300/$150,500 = 142.39

   LIFO Inventory	Base Cost	Index	LIFO Value
   January 1, 2006, Base Year	$140,000	100.00%	$140,000
   2006 Layer	$34,750	109.70%	$38,120
   2006 Liquidation	(24,250) (4)	109.70%	($26,600)
   	$150,500		$151,520
   Inventory at Current Cost (FIFO equivalent)			214,300
   LIFO Reserve (Current Year Benefit)			62,780
   LIFO Reserve at 1/1/00			13,580
   2007 Benefit			$49,200

   Caution: 

   There are many things to consider when making the decision to convert to the LIFO dollar-based valuation method. Do not base your decision on our description of LIFO. Consult your own accountant or in-house accounting department before making any decisions.

   LIFO records are stored on a yearly basis per LIFO category used each year. For the current year and all years thereafter, the Product LIFO Valuation Master List Report automatically creates the LIFO valuation records. Therefore, you should never have to manually create records unless you want LIFO valuation records for previous years.

   The Product LIFO Valuation Master List Report prints all information set up in the Product Extended Last-In-First-Out Valuation Setup file for the ranges selected. Print this report to verify the static information. Do this before the run the Product LIFO Valuation Master List Report for the current year.

   The WT In Transit quantity from Product Warehouse Product Setup-Costs is included in the calculation of the LIFO calculation. This formula is used:

   • On Hand + Unavailable + Received + WT In Transit