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Chapter 8: Question 11Q (page 421)

Specific identification is sometimes said to be the ideal method of assigning a cost to inventory and to the cost of goods sold. Briefly indicate the arguments for and againstthis method of inventory valuation.

Short Answer

Expert verified

Special identification is a method of valuing inventory at a specific cost for each specific item. This is an ideal method with several difficulties.

Step by step solution

01

Arguments for the special identification method

The major argument for the special identification method is that it is the ideal method of valuing inventory. This is because it is the only method through which the actual cot can match with actual revenue. Thus under this method, the physical flow of goods matches the cost flow of goods.

02

Arguments against special identification method

One of the arguments against the special identification method is that the reported income can be manipulated by showing higher costs or lower costs. This may lead to tax evasion or other malpractices.

Another problem with this method is the arbitrary issue. This arbitrary issue is due to the difficulty of allocating indirect expenses to inventory.

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Most popular questions from this chapter

Prepare a memorandum containing responses to the following items.

(a) Describe the cost flow assumptions used in average-cost, FIFO, and LIFO methods of inventory valuation.

(b) Distinguish between weighted-average-cost and moving-average-cost for inventory costing purposes.

(c) Identify the effects on both the balance sheet and the income statement of using the LIFO method instead of the FIFOmethod for inventory costing purposes over a substantial time period when purchase prices of inventoriable items arerising. State why these effects take place.

Trout Company uses the LIFO method for financial reporting purposes but FIFO for internal reporting purposes. At January 1, 2017, the LIFO reserve has a credit balance of \(1,300,000. At December 31, 2017, Trout鈥檚 internal reports indicatedthat the FIFO inventory balance was \)2,900,000 and for external reporting purposes the LIFO inventory balance was $1,500,000.What is the amount of the LIFO reserve and the LIFO effect related to 2017? What is the journal entry needed to record the LIFOeffect at December 31, 2017?

Shawnee Corp., a household appliances dealer, purchases its inventories from various suppliers. Shawnee has consistently stated its inventories at FIFO cost.

Instructions

Shawnee is considering alternate methods of accounting for the cash discounts it takes when paying its suppliers promptly.From a theoretical standpoint, discuss the acceptability of each of the following methods.

(a) Financial income when payments are made.

(b) Reduction of cost of goods sold for the period when payments are made.

(c) Direct reduction of the purchase cost.

In what ways are the inventory accounts of a retailing company different from those of a manufacturing company?

Question: Fong Sai-Yuk Company sells one product. Presented below is information for January for Fong Sai-Yuk Company.

Jan. 1 Inventory 100 units at \(5 each

4 Sale 80 units at \)8 each

11 Purchase 150 units at \(6 each

13 Sale 120 units at \)8.75 each

20 Purchase 160 units at \(7 each

27 Sale 100 units at \)9 each

Fong Sai-Yuk uses the FIFO cost flow assumption. All purchases and sales are on account.

Instructions

(a) Assume Fong Sai-Yuk uses a periodic system. Prepare all necessary journal entries, including the end-of-month closing entry to record cost of goods sold. A physical count indicates that the ending inventory for January is 110 units.

(b) Compute gross profit using the periodic system.

(c) Assume Fong Sai-Yuk uses a perpetual system. Prepare all necessary journal entries.

(d) Compute gross profit using the perpetual system.
See all solutions

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