Using this method companies can accurately determine

This preview shows 7 out of 9 pages.

Illustration 6-3). Using this method, companies can accurately determine ending inventory and cost of goods sold. SOLD SOLD $700 Cost of goods sold = $700 + $800 = $1,500 Ending inventory = $750 $800 $750 Ending Inventory Illustration 6-3 Specific identification method Specific identification requires that companies keep records of the original cost 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 could be identified clearly from the time of purchase through the time of sale. Examples of such products are cars, pianos, or expensive antiques. Today, bar coding, electronic product codes, and radio frequency identification make 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 than PDF Watermark Remover DEMO : Purchase from to remove the watermark
Image of page 7

Subscribe to view the full document.

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 Assumptions Because specific identification is often impractical, other cost flow meth- ods are permitted. These differ from specific identification in that they assume flows 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-cost There is no accounting requirement that the cost flow assumption be consis- tent with the physical movement of the goods. Company management selects the appropriate cost flow method. To illustrate these three inventory cost flow methods, we will assume that Houston Electronics uses a periodic inventory system. The information for its Astro 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 Costing 255 2 We have chosen to use the periodic approach for a number of reasons: First, many companies that use a perpetual inventory system use it to keep track of units on hand, but then determine cost of goods sold at the end of the period using one of the three cost flow approaches applied under essentially a periodic approach. In addition, because of the complexity, few companies use average 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 results under 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 6-4 Cost of goods available for sale HOUSTON ELECTRONICS Astro Condensers Date Explanation Units Unit Cost Total Cost Jan. 1 Beginning inventory 100 $10 $ 1,000 Apr. 15 Purchase 200 11 2,200 Aug. 24 Purchase 300 12 3,600 Nov. 27 Purchase 400 13 5,200 Total 1,000 $12,000 The company had a total of 1,000 units available that it could have sold during the period.The total cost of these units was $12,000.A physical inventory at the end
Image of page 8
Image of page 9
You've reached the end of this preview.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern