Specific Identification: Videos & Practice Problems

The specific identification method in inventory valuation is a technique used to track and value each unique or easily identifiable inventory item individually. This method is particularly useful for items that are distinct, such as customized products or high-value goods like yachts. By identifying the exact cost of each unit sold, companies can accurately calculate the cost of goods sold (COGS) and remaining inventory. This method ensures precise financial reporting and helps in understanding gross profit by directly linking revenue to specific inventory costs.

The specific identification method directly impacts the cost of goods sold (COGS) by allowing companies to track the exact cost of each unit sold. When an item is sold, the specific cost associated with that item is recorded as COGS. This ensures that the COGS reflects the actual cost of the sold inventory, leading to more accurate financial statements. For example, if a yacht valued at $500,000 is sold, the COGS will be $500,000, precisely matching the cost of the sold item.

Businesses that deal with unique, high-value, or easily identifiable items benefit most from using the specific identification method. Examples include luxury car dealerships, jewelry stores, art galleries, and companies selling customized products like yachts or specialized machinery. These businesses can accurately track the cost of each individual item, ensuring precise inventory valuation and financial reporting. This method is less practical for businesses with large volumes of identical, low-cost items, such as grocery stores or retail chains.

Sure! Let's say a company sells a yacht (Yacht B) valued at $500,000 for $800,000. The journal entry for the sale would be:

Debit: Cash $400,000 (half of the sale price received in cash)

Debit: Accounts Receivable $400,000 (remaining amount to be received)

Credit: Revenue $800,000 (total sale price)

Additionally, the entry for the cost of goods sold (COGS) would be:

Debit: COGS $500,000 (cost of the yacht)

Credit: Inventory $500,000 (removal of the yacht from inventory)

The specific identification method enhances gross profit understanding by directly linking revenue to the specific costs of sold inventory items. By accurately tracking the cost of each unit sold, companies can determine the exact cost of goods sold (COGS) and compare it to the revenue generated from the sale. This precise matching allows for a clear calculation of gross profit. For instance, if a yacht sold for $800,000 had a cost of $500,000, the gross profit would be $300,000, providing a transparent view of profitability.