Auto Dealerships - Audit Technique Guide - Uncle Fed's Tax*Board

To compute the LIFO index, both the latest acquisition and earliest acquisition methods require
comparison of each vehicle in the current year’s ending inventory to a similarly equipped vehicle in
the prior year. The difference between the two methods lies in which purchase cost is used in the
computation.
Dealers that elect to use the latest acquisition method must determine the last purchase (latest
acquisition), during the current year, of each vehicle in ending inventory. (For latest acquisition,
generally the vehicle on hand at the end of the year is the latest acquisition.) The cost of the latest
acquisition of the vehicle must be compared to the cost of the latest purchase in the prior year of a
similarly equipped vehicle.
Dealers that elect to use the earliest acquisition method must determine the first purchase (earliest
acquisition), during the current year, of each vehicle in ending inventory. The earliest acquisition
must be determined for a vehicle similarly equipped to the vehicle in ending inventory. The cost
of the first purchase of the vehicle must then be compared to the cost of the first purchase of a
similarly equipped vehicle in the prior year.
For example: the dealer has in ending inventory a fully loaded Dodge Intrepid. Review of
purchase invoices indicates that the dealer first purchased a similarly equipped Intrepid in May of
the current year. The cost of the May purchase is the current year cost for purposes of computing
the LIFO index. The dealer must then analyze vehicle purchases for the prior tax year and
determine the first purchase of a similarly equipped Dodge Intrepid. The cost of the first purchase
in the prior year is the prior year cost for the purpose of the LIFO computation.
Regardless of which method is elected, if the vehicle is determined to be a new item for purposes
of the LIFO computation, the prior year cost is the same as the current year cost, i.e. 1.00 index.
(Current year cost is determined as noted above.)
From these invoices, the indices will be created. The agent needs to determine the manufacturer,
model year and model type of the various distinct vehicles the dealership has in ending inventory,
separated into two pools, cars and trucks. This is necessary to insure the same vehicles are being
"compared" during the applicable measuring periods. To illustrate this concept consider the
following:
The current year and year of examination is 9312. The first year of the dealership LIFO election
was for the year ending December 31, 1991. The Form 970 indicates this taxpayer has elected to
use the Link Chain, Latest Acquisitions Method to value the inventory. Review of the general
ledger indicates the 9112 dealership ending inventory has a dollar value of $224,000. This dollar
value was represented by the following vehicles:
Model Year 1992 - December 31, 1991
Extended
Model Quantity Cost Cost
Car A 1 $22,000 $ 22,000
Car B 2 23,000 46,000
Car C 6 26,000 156,000
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