Question

For this week’s reflection, please write three complete and well composed paragraphs where you describe, in your own words, a situation where a merchant would use the specific identification method for recording inventory costs.

Answer 1

Specific identification is a method of finding out ending inventory cost.

It requires a detailed physical count, so that the company knows exactly how many of each goods brought on specific dates remained at year end inventory. When this information is found, the amount of goods are multiplied by their purchase cost at their purchase date, to get a number for the ending inventory cost.In theory, this method is the best method, since it relates the ending inventory goods directly to the specific price they were bought for. However, this method allows management to easily manipulate ending inventory cost, since they can choose to report that the cheaper goods were sold first, hence increasing ending inventory cost and lowering cost of goods sold. This will increase the income. Alternatively, management can choose to report lower income, to reduce the taxes they needed to pay.

How it is useful for a merchant?

Be able to track the cost of each item individually. The accounting system should clearly identify the cost of each purchased item, and associate it with a unique identification number.

The specific identification method introduces a high degree of accuracy to the cost of inventory, since the exact cost at which something was purchased can be recorded in the inventory records, and charged to the cost of goods sold when the related item is sold.

This method is used by car dealers or high end jewellery . Suppose apple company has specific identification number as which they sell as characterised above.