Contrasting the front and back end components of dollar value LIFO calculations (2023)

All dollar value LIFO calculations consist of two separate components to arrive at the bottom line (some would consider the bottom line to be the current year-end LIFO reserve; others might consider it the current year-end LIFO inventory balance). We call these two components the front and back ends of a LIFO calculation.

Front-end calculation component

The front end of the LIFO calculation is the current year or cumulative index (or inflation) calculation. We call this process the frontend because the backend component of the LIFO calculation is dependent on the outputs or results of the frontend, which means the backend cannot be completed until the frontend outputs are developed. The specific steps for front-end calculations depend on whether inflation is calculated using internally or externally developed inflation indices.

Front-end internal index calculations

For internal index calculations, current stock levels are multiplied by their current and previous or base year item/unit costs on an item basis to calculate the sum of rollovers, divide the current and previous or rolled base period costs & calculate a current year or cumulative inflation index (or indexes by LIFO pool if there are multiple pools). The internal front-end index component also includes many other considerations such as: For example, how to treat new items, how to handle exceptions, perform analysis to identify outliers, and determine whether to include or exclude certain outliers from the index calculation.

Backend calculation component

The back-end can be viewed as a LIFO inventory or reserve calculation and described as an exercise that calculates the front-end outputs of the current period (i.e. current year and/or cumulative index(es) and inventory balance(s) by LIFO pool) insert the back-end expenses of the previous period to calculate the LIFO inventory, reserve and expenses (income) of the current period (LIFO expenses (income) = change in current versus previous period LIFO reserve; Increase in CY versus PY LIFO Reserve = Expense and Decrease = Income). Together, these two components are an integral part of dollar value LIFO calculations. The following figures provide a summary of what has been described above:

Components of the internal index calculation

Components of the external index calculation

Comparison of front and back end of calculations in the LIFOPro software

Internal index module –Completes the front and backend for internal indexes
External index module –Completes the front and back end for IPIC LIFO calculations using the Bureau of Labor Statistics (BLS) consumer or producer price indices (CPI/PPI)
screen 3
- Completes the back-end of LIFO calculations when the user enters the following front-end calculation outputs:
  - Inventories at cost by LIFO pool - this is the inventory levels in your ledger that are tracked without regard to LIFO (i.e. cost), which is typically FIFO, average cost, or sometimes EAC, standard cost, or some other non-LIFO method (Note: This is a single amount if you have 1 LIFO pool)
  - Year-to-Date Indices by LIFO Pool (single index for 1 LIFO pool)
- Can also be used to complete mid to high interim estimates and ad hoc forecasts

Functionality of the internal and external index modules (front and back end)

Frontend
- internal index
  - The user loads a data entry sheet with the following fields (additional fields required depending on the settings you want to apply):
    - Item number or description
    - amount in stock
    - CY & PY or base year item/unit cost
  - The user applies the desired item cost and analysis settings
  - The LIFOPro software completes the calculation of the CY index
  - Full set of frontend reports generated and saved automatically
- External index
  - The user applies the desired settings in the IPIC module menu screen
  - The user loads a data entry sheet with the following fields (additional fields required depending on the settings you want to apply):
    - BLS Category Code/Number (CPI/PPI Category/Code)
    - Year-end inventory balance for all BLS category codes/numbers included in the data entry sheet (can be a summarized or detailed list)
  - The LIFOPro software completes the calculation of the CY index
  - Full set of frontend reports generated and saved automatically
rear end
- Front-end outputs are streamed into a software LIFO database file
- On-screen year-to-date summary report with front and backend results
- Internal Indexes Only: The user enters GL balances at cost by LIFO pool in the internal index engine screen when the advanced CY cost totals generated from the front-end calculation are not linked to the GL totals
- External Indexes Only: On the IPIC report screen, the user selects the Go to Screen 3 button to enter GL balances at cost by LIFO pool when the balances generated from the front-end calculation are not linked to the GL totals
- The user selects the close year end button to save the back-end results to the software LIFO database file
- All backend reports have been updated to reflect the results of the calculation just completed (last completed period)

How screen 3 works (backend only)

LIFOPro software was originally developed to manage only the back end of LIFO calculations. The external index engine, which handles the front end of the IPIC LIFO calculations, was only developed in the late 90's, and the internal index engine, which handles the front end of the internal index calculations, was only released this year. For this reason, a backend LIFO calculation called Screen 3 still exists today. This module represents the legacy version of the LIFOPro software and provides users with the following features:

Internal and external indices:
- Automating the back-end of LIFO calculations after completing the front-end of LIFO calculations outside of the software and inputting inventory balances at cost and CY indices by LIFO pool (inventory levels at cost = FIFO, average cost, EAC, etc.). These are your ledger inventory balances gross of your LIFO reserve): This is intended for users who want to keep the back end of their LIFO calculation within the software but do the front end of their LIFO calculations outside of the software.
- Automate LIFO estimates by entering forecast or forecast inventories and indices
External indexes only:
- Year-end calculation: update the inventory balances calculated in the external index module in the data entry sheet to link them to the GL balances at acquisition cost – this may be required when the data entry sheet totals loaded by the user for the CY index calculation (frontend) do not match the GL balances at acquisition cost (i.e. FIFO, average cost, etc.). Users complete the front end of the calculation in the external index module and select the "Go to Screen 3" button to enter their G/L balances by pool at cost into the input cells. The front-end CY index calculation values are automatically transferred to screen 3 and the back-end LIFO calculation values are automatically updated after the GL balances are entered by pool.
- Intermediate Estimates: Users can make what is known as a “median” estimate by applying the most recently published BLS inflation indices to last year's product mix and the current period's actual or forecast inventory levels at cost by LIFO pool. Users select the yellow button to load the previous year's calculation data, press the Calculate button to apply the most recently published BLS indices, and select the Go to Screen 3 button to view the current period's actual or forecast stock balances to view costs by LIFO pool. The front-end CY index calculation values are automatically transferred to screen 3 and the back-end LIFO calculation values are automatically updated after the GL balances are entered by pool.

The central theses

The LIFOPro software does both the front and back end of the LIFO calculations
This means you can manage almost all of your LIFOs within LIFOPro software and reduce your manual effort to:
- Internal indices:
  - Prepare the data entry sheet by exporting the inventory report from the accounting database (often referred to as the item detail, inventory status, or inventory valuation report)
  - Selection of the desired calculation and analysis settings within the software
  - Record journal entries and adjust LIFO inventory/reserve account balances to link to amounts shown in LIFOPro reports
- External indices:
  - Export inventory report from accounting database
  - Assign BLS categories to the inventory report
  - Selection of the desired calculation and analysis settings within the software
  - Record journal entries and adjust LIFO inventory/reserve account balances to link to amounts shown in LIFOPro reports
Screen 3 allows users to quickly and easily do the following:
- Create interim estimates and ad hoc forecasts quickly and easily without having to prepare or load inventory reports
- For external index users, include the ledger balances in the software that should be used for the backend of the calculation, after performing the frontend of the calculation, if the frontend input values are not linked to the ledger totals (for example, if the data entry sheet was loaded by user for front-end calculation represents only 75% of total inventory, balances at acquisition cost by LIFO pool to calculate LIFO inventory, reserve and expense (revenue) amounts i.e. back-end should be updated to link them to ledger totals Internal index users perform this step on the Internal Index Module screen)
- Do the backend of the calculation when the frontend has been completed outside the software