Specific Identification
Encyclopedia
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.
On 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 tax
es they needed to pay.
This method is also a very hard to use on interchangeable goods. For example, it is hard to relate shipping
and storage
costs to a specific inventory item. These number will need to be estimated, and hence reducing the specific identification 's benefit of being extremely specific.
Ending Inventory
Ending inventory is the amount of inventory a company have in stock at the end of this fiscal year. It is closely related with ending inventory cost, which is the amount of money spent to get these goods in stock. It should be calculated at the lower of cost or market.-References:1...
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.
On 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
Cost of goods sold
Cost of goods sold refers to the inventory costs of those goods a business has sold during a particular period. Costs are associated with particular goods using one of several formulas, including specific identification, first-in first-out , or average cost...
. This will increase the income. Alternatively, management can choose to report lower income, to reduce the tax
Tax
To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...
es they needed to pay.
This method is also a very hard to use on interchangeable goods. For example, it is hard to relate shipping
Shipping
Shipping has multiple meanings. It can be a physical process of transporting commodities and merchandise goods and cargo, by land, air, and sea. It also can describe the movement of objects by ship.Land or "ground" shipping can be by train or by truck...
and storage
Warehouse
A warehouse is a commercial building for storage of goods. Warehouses are used by manufacturers, importers, exporters, wholesalers, transport businesses, customs, etc. They are usually large plain buildings in industrial areas of cities and towns. They usually have loading docks to load and unload...
costs to a specific inventory item. These number will need to be estimated, and hence reducing the specific identification 's benefit of being extremely specific.
See also
- Inventory
- Weighted average cost
- Moving-average cost
- FIFO and LIFOFIFO and LIFO accountingFIFO and LIFO Methods are accounting techniques used in managing inventory and financial matters involving the amount of money a company has tied up within inventory of produced goods, raw materials, parts, components, or feed stocks....