1. Explain the following terms.

(a) LIFO layer.

(b) LIFO reserve.

(c) LIFO effect.

2. On December 31, 2011, the inventory of Powhattan Company amounts to $800,000. During 2012, the company decides to use the dollar value LIFO method of costing inventories. On December 31, 2012, the inventory is $1,053,000 at December 31, 2012, prices. Using the December 31, 2011, price level of 100 and the December 31, 2012, price level of 108, compute the inventory value at December 31, 2012, under the dollar value LIFO method.

3. In an article that appeared in the Wall Street Journal, the phrases “phantom (paper) profits” and “high LIFO profits” through involuntary liquidation were used. Explain these phrases.