specific identification method

Examples of specific identification method in the following topics:

• Specific Identification Method

  • Specific identification is a method of finding out ending inventory cost that requires a detailed physical count.
  • The specific identification costing method attaches cost to an identifiable unit of inventory.
  • Specific identification is a method of finding out ending inventory cost.
  • The specific identification costing method attaches cost to an identifiable unit of inventory.
  • Describe how a company would use the specific identification method to value inventory

• Costing Methods Overview

  • There are four accepted methods of costing items: specific identification; first-in, first-out; last-in, first-out; and weighted-average.
  • Each method has advantages and disadvantages.
  • The specific identification method of inventory costing attaches the actual cost to an identifiable unit of product.
  • Under the specific identification method, the firm must identify each unit in inventory, unless it is unique, with a serial number or identification tag.
  • This method assumes the first goods purchased are the first goods sold.

• Selecting an Inventory Method

  • Specific Identification: Assume that a company bought three identical units of a given product at different prices.
  • Companies that use the specific identification method of 'inventory costing' state their cost of goods sold and ending inventory as the actual cost of specific units sold and on hand.
  • Some accountants argue that this method provides the most precise matching of costs and revenues and is therefore the most theoretically sound method.
  • However, one disadvantage of the specific identification method is that it permits the manipulation of income.
  • Summarize the differences between LIFO, FIFO and Specific Identification and explain how a company would use that information to select an inventory method

• Cost Flow Assumptions

  • This is for financial reporting and tax purposes only and does not have to agree with the actual movement of goods (companies typically choose a method because of its particular benefits, such as lower taxes) .
  • The only requirement, regardless of method is that: The total cost of goods sold plus the cost of the goods remaining in the ending inventory for financial and tax purposes is equal to the actual cost of goods available.
  • Tends to ignore extreme costs of inventory and there is no theoretical reasoning for using this method
  • Explain how a company's inventory cost flow assumptions dictate which method it will use for inventory valuation

• Components of Inventory Cost

  • Traditional cost accounting methods attempt to make these assumptions based on past experience and management judgment as to factual relationships.
  • Other methods may be used to associate overhead costs with particular goods produced.
  • Her cost of goods sold depends on her inventory method.
  • Under specific identification, the cost of goods sold is:
  • Thus, her profit for accounting and tax purposes may be $20, $18, or $16, depending on her inventory method.

• Valuing Notes Receivable

  • Companies have two methods available to them for measuring the net value of accounts receivable: the allowance method and the direct write-off method.
  • Companies have two methods available to them for measuring the net value of accounts receivable--the allowance method and the direct write-off method.
  • by reviewing each individual debt and deciding whether it is doubtful (a specific provision)
  • The second method is the direct write off method.
  • Differentiate between the allowance method and the write off method for valuing notes receivable

• Cost of Goods Sold and Gross Profit

  • Costs are associated with particular goods by using one of several formulas, including specific identification, first-in-first-out (FIFO), or average cost.

• Valuing Accounts Receivable

  • Companies use two methods to account for bad debts: the direct write-off method and the allowance method.
  • For tax purposes, companies must use the direct write-off method, under which bad debts are recognized only after the company is certain the debt will not be paid.
  • Under the allowance method, an adjustment is made at the end of each accounting period to estimate bad debts based on the business activity from that accounting period.
  • Since the specific customer accounts that will become uncollectible are not yet known when the adjusting entry is made, a contra-asset account named allowance for bad debts, which is sometimes called allowance for doubtful accounts, is subtracted from accounts receivable to show the net realizable value of accounts receivable on the balance sheet.
  • Differentiate between the direct write-off method and the allowance method of accounts receivable valuation

• Write-Offs

  • Companies use two methods for handling uncollectible accounts: the allowance method and the direct write-off method.
  • Companies use two methods for handling uncollectible accounts: the direct write-off method and the allowance method.
  • This amount is accumulated in a provision, which is then used to reduce specific receivable accounts when necessary.
  • Note that the allowance method is the required method for federal income tax purposes (GAAP).
  • As time passes and a firm considers a specific customer's account to be uncollectible, it writes that account off.

• Recognizing Notes Receivable

  • The first method is the allowance method, which establishes a contra-asset account, allowance for doubtful accounts, or bad debt provision, that has the effect of reducing the balance for accounts receivable.
  • The amount of the bad debt provision can be computed in two ways, either (1) by reviewing each individual debt and deciding whether it is doubtful (a specific provision); or (2) by providing for a fixed percentage (e.g. 2%) of total debtors (a general provision).
  • This second method is simpler than the allowance method in that it allows for one simple entry to reduce accounts receivable to its net realizable value.
  • The two methods are not mutually exclusive, and some businesses will have a provision for doubtful debts, writing off specific debts that they know to be bad (for example, if the debtor has gone into liquidation. )
  • Describe the difference between using the allowance method vs. the write off method when recording a note receivable