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

NON-LIFO
RESERVE
(Inventory per General Ledger)(usually specific cost)
(Less: LIFO Inventory Value)
(Cumulative Reserve)
The LIFO reserve shown in the equation is the "Cumulative LIFO Reserve Balance," which is
what you should see on the Balance Sheet of the return under "Inventory." This is the amount of
reserve that has accumulated over the years since LIFO was first elected. The question may arise
as to why a cumulative amount of reserve is maintained. Not only does it present the value of the
inventories under the selected method of accounting, but if the dealer ever disposes of the
franchise of the particular make of vehicles, the reserve will have to be recaptured.
To find out how much the dealer has deducted each year as a current year adjustment on the
reserve, it is necessary to subtract the prior year’s cumulative LIFO reserve. The difference is the
amount to be adjusted in the current year.
To illustrate these principles, consider the index example introduced in the previous section as an
aid to demonstrate the mechanics of computing the LIFO Reserve:
The Base Year was 1991. The Base Year Cost was $224,000.
The taxpayer elected Dollar Link Chain LIFO.
The dealership had the following cars in ending inventory on December 31, 1991:
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
Base Year Cost 9112 $224,000
At December 31, 1992, Model Year 1993, the dealership had the following vehicles in ending
inventory:
Extended
Extended
Quantity Model CYC CYC BOYC BOYC
5 Car A $23,000 $115,000 $22,000 $110,000
6 Car B 24,000 144,000 23,000 138,000
9 Car C 27,000 243,000 26,000 234,000
20 $502,000 $482,000
BOYC = Beginning of Year Costs. This is the December 31, 1991, price of the same vehicle
showing in the December 31, 1992, ending inventory.
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