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Illustration 6-3). Using this method, companies can accurately determine endinginventory and cost of goods sold.SOLDSOLD$700Cost of goods sold = $700 + $800 = $1,500Ending inventory = $750$800$750EndingInventoryIllustration 6-3Specific identificationmethodSpecific identification requires that companies keep records of the originalcost of each individual inventory item. Historically, specific identification was pos-sible only when a company sold a limited variety of high-unit-cost items that couldbe identified clearly from the time of purchase through the time of sale. Examplesof such products are cars, pianos, or expensive antiques.Today, bar coding, electronic product codes, and radio frequency identificationmake it theoretically possible to do specific identification with nearly any type of prod-uct.The reality is, however, that this practice is still relatively rare. Instead, rather thanPDF Watermark Remover DEMO : Purchase from to remove the watermark
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keep track of the cost of each particular item sold, most companies make as-sumptions, called cost flow assumptions, about which units were sold.Cost Flow AssumptionsBecause specific identification is often impractical, other cost flow meth-ods are permitted. These differ from specific identification in that theyassumeflows of costs that may be unrelated to the physical flow of goods.There are three assumed cost flow methods:1.First-in, first-out (FIFO)2.Last-in, first-out (LIFO)3.Average-costThere is no accounting requirement that the cost flow assumption be consis-tent with the physical movement of the goods.Company management selects theappropriate cost flow method.To illustrate these three inventory cost flow methods, we will assume thatHouston Electronics uses a periodic inventory system. The information for itsAstro condensors is shown in Illustration 6-4.2(An appendix to this chapter pres-ents the use of these methods under a perpetual system.)Inventory Costing2552We have chosen to use the periodic approach for a number of reasons:First, many companiesthat use a perpetual inventory system use it to keep track of units on hand, but then determinecost of goods sold at the end of the period using one of the three cost flow approaches appliedunder essentially a periodic approach. In addition, because of the complexity, few companies useaverage cost on a perpetual basis. Also, most companies that use perpetual LIFO employ dollar-value LIFO, which is presented in more advanced texts. Furthermore, FIFO gives the same resultsunder either perpetual or periodic. And finally, it is easier to demonstrate the cost flow assump-tions under the periodic system, which makes it more pedagogically appropriate.Illustration 6-4Cost of goods available for saleHOUSTON ELECTRONICSAstro CondensersDateExplanationUnitsUnit CostTotal CostJan.1Beginning inventory100$10$ 1,000Apr. 15Purchase200112,200Aug. 24Purchase300123,600Nov. 27Purchase400135,200Total1,000$12,000The company had a total of 1,000 units available that it could have sold duringthe period.The total cost of these units was $12,000.A physical inventory at the end
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