Ch 5 Ep 2 Specific Identification Method - YouTube

This segment is going to look at using the specific identification method to track inventory

costs.

Recall, that when we were accounting for inventory there are three primary issues.

In this video we’re going to look at methods that can be used to determine cost of goods

sold when inventory is sold and how we determine the amount that we assigned to inventory that

remains.

Accounting for inventory can be done either under a perpetual inventory system or a periodic

system.

Under a perpetual inventory system, the inventory account is updated at the time of each sale

or purchase of the inventory.

In a periodic inventory system, the inventory account is just periodically updated for sales

and purchases.

We’re going to work primarily with the perpetual inventory system.

Most companies today use that, given the use of barcodes.

Means every time inventory is purchased or sold the inventory account is updated at that

time.

So, there are four methods that can be used to track costs in a perpetual inventory system.

And that is the specific identification method, the FIFO method, the LIFO method, and the

weighted average.

Let’s take a look at specific identification.

Under this method, inventory is specifically identified when it is sold.

And we specifically identify the inventory item that was sold.

We then are able to identify exactly the cost that we had paid for that inventory when it

was purchased.

So, to learn the specific identification method and how we apply it, we will use the following

cost information.

This company is starting off on August 1st with ten units in their inventory that they

had paid $91 apiece for, beginning inventory of 910.

There were three purchases during the month of August.

They purchased 15 units on August 3rd paying $106 for each unit for a cost of that purchase

of 1590.

On the 17th and the 28th they made two more purchases of 20 units and ten units at a cost

of 115 and 119 respectively.

During the month of August there were also two sales.

Twenty units were sold on August 14th, and they were sold at a price of $130 per unit.

And on August 31st, 23 units were sold and they were sold for $150 each.

Using the specific identification method, we are going to track the inventory cost,

so, that when we made these two sales we know what cost to assign to the inventory that

was sold.

So, let’s see this in chronological order.

On August 1st, recall, we started with ten units at $91 apiece.

Inventory at the beginning of August was $910.

On August 3rd, 15 units were purchased at $106 each, adding 1590 to the inventory, bringing

the amount of inventory available for sale to $2,500.

On August 14, the company sold eight units.

Those eight units, they specifically identified that $91 had been paid for eight of the units

and 12 units they had paid $106 for.

For the units sold, 20 units sold on August 14th.

The company specifically identified that eight had been purchased at a cost of 91 and 12

had been purchased at a cost of 106.

That means, the total cost of goods sold that will be assigned to the sale on August 14th

is $2,000.

After this is sold, of the 10 units, eight had been sold.

It will leave two units at a cost of $91 apiece still on hand.

And of the 15, 12 had been sold, leaving three units on hand at a cost of 106, leaving the

inventory on hand after that sale of $500.

After that sale, two more purchases were made during August.

With each of those purchases the amount of inventory available for sale increased.

So, when we sold 22 units at the end of August on August 31st in order to determine the cost

that we assigned to those units sold, the company had to specifically identify of the

23 units sold what the cost had been for each of those.

So, of the 23 units sold, they determined that two had a cost of $91, three had a cost

of 106, 15 had a cost of 115, and three had a cost of 119, all of which had been determined

by the company.

That means, the cost of goods sold for the sale on August 31st in total is 2,582, leaving

a balance of 1,408 of inventory

on hand which was the inventory available before the sale less the cost of the inventory

sold, $1,408.

So, here are the journal entries that would be recorded as we were making these calculations.

The numbers in red are determined by the specific identification method which is the cost flow

assumption that we’re using.

So, August 3rd, when inventory was purchased, we would debit the inventory account and credit

accounts payable.

When a sale is made, remember there are two journal entries: we have to record the revenue

being earned, which is the unit sold at their selling price, we also have to record the

cost of the inventory that was sold to earn those revenues.

And this is where specific identification method helped us assign a cost to the inventory

sold.

The same thing happened down here on August 31st using specific identification method.