Specific Identification Method

Oct 13, 2025 by recoveryshake.com 78 views

Overview of the Last-In, First-Out (LIFO) Method

The Last-In, First-Out (LIFO) method is a cost accounting method used to determine the cost of goods sold. This method assumes that the most recent purchases are sold first. In other words, the last items purchased are the first ones to be sold. The LIFO method is commonly used in the United States, but it is not allowed in the International Financial Reporting Standards (IFRS).

Assumptions and Data

To calculate the cost of goods sold using the LIFO method, we need to make the following assumptions and have the following data:

The company sells 100 units in June.
The company has two purchases of inventory: one on May 1st and one on June 1st.
The cost of the first purchase on May 1st is $10 per unit.
The cost of the second purchase on June 1st is $12 per unit.
The company has no beginning inventory.

Step 1: Determine the Cost of Goods Available for Sale

The cost of goods available for sale is the sum of the beginning inventory and the cost of the two purchases.

Cost of goods available for sale = Beginning inventory + Cost of first purchase + Cost of second purchase
Cost of goods available for sale = 0 + ($10 per unit x 0) + ($12 per unit x 50)
Cost of goods available for sale = $600

Step 2: Determine the Cost of Goods Sold Using the LIFO Method

To calculate the cost of goods sold using the LIFO method, we need to determine the cost of the 100 units sold. Since the LIFO method assumes that the most recent purchases are sold first, we will use the cost of the second purchase ($12 per unit) for the first 50 units sold.

Cost of first 50 units sold = $12 per unit x 50
Cost of first 50 units sold = $600

For the remaining 50 units sold, we will use the cost of the first purchase ($10 per unit).

Cost of remaining 50 units sold = $10 per unit x 50
Cost of remaining 50 units sold = $500

Step 3: Calculate the Total Cost of Goods Sold

The total cost of goods sold is the sum of the cost of the first 50 units sold and the cost of the remaining 50 units sold.

Total cost of goods sold = Cost of first 50 units sold + Cost of remaining 50 units sold
Total cost of goods sold = $600 + $500
Total cost of goods sold = $1,100

Conclusion

The cost of goods sold using the LIFO method is $1,100. This is the amount that the company will expense as the cost of goods sold for the month of June.

Limitations of the LIFO Method

The LIFO method has several limitations. One of the main limitations is that it does not accurately reflect the cost of goods sold. The LIFO method assumes that the most recent purchases are sold first, which may not be the case in reality. Additionally, the LIFO method can result in a lower cost of goods sold, which can be beneficial for tax purposes. However, this can also result in a lower net income, which may not be desirable.

Alternative Methods

There are several alternative methods that can be used to calculate the cost of goods sold, including:

First-In, First-Out (FIFO) Method: This method assumes that the oldest purchases are sold first.
Weighted Average Cost (WAC) Method: This method calculates the average cost of the inventory based on the cost of the purchases and the quantity of the inventory.
Specific Identification Method: This method requires that each item of inventory be identified and valued separately.

Conclusion

The LIFO method is a cost accounting method used to determine the cost of goods sold. While it has several limitations, it can be a useful tool for companies that want to minimize their tax liability. However, companies should carefully consider the limitations of the LIFO method and consider alternative methods before making a decision.

References

American Institute of Certified Public Accountants (AICPA). (2022). Accounting Standards Codification (ASC) 330, Inventory.
Financial Accounting Standards Board (FASB). (2022). Accounting Standards Codification (ASC) 330, Inventory.

Additional Resources

AICPA. (2022). Inventory Accounting.
FASB. (2022). Inventory Accounting.

Final Answer

The final answer is: $1,100

Overview of the Last-In, First-Out (LIFO) Method

Q&A

Q: What is the Last-In, First-Out (LIFO) method?

A: The LIFO method is a cost accounting method used to determine the cost of goods sold. This method assumes that the most recent purchases are sold first.

Q: What are the assumptions and data needed to calculate the cost of goods sold using the LIFO method?

A: The assumptions and data needed to calculate the cost of goods sold using the LIFO method include:

The company sells 100 units in June.
The company has two purchases of inventory: one on May 1st and one on June 1st.
The cost of the first purchase on May 1st is $10 per unit.
The cost of the second purchase on June 1st is $12 per unit.
The company has no beginning inventory.

Q: How do I calculate the cost of goods available for sale?

A: To calculate the cost of goods available for sale, you need to determine the sum of the beginning inventory and the cost of the two purchases.

Cost of goods available for sale = Beginning inventory + Cost of first purchase + Cost of second purchase
Cost of goods available for sale = 0 + ($10 per unit x 0) + ($12 per unit x 50)
Cost of goods available for sale = $600

Q: How do I calculate the cost of goods sold using the LIFO method?

A: To calculate the cost of goods sold using the LIFO method, you need to determine the cost of the 100 units sold. Since the LIFO method assumes that the most recent purchases are sold first, you will use the cost of the second purchase ($12 per unit) for the first 50 units sold.

Cost of first 50 units sold = $12 per unit x 50
Cost of first 50 units sold = $600

For the remaining 50 units sold, you will use the cost of the first purchase ($10 per unit).

Cost of remaining 50 units sold = $10 per unit x 50
Cost of remaining 50 units sold = $500

Q: How do I calculate the total cost of goods sold?

A: The total cost of goods sold is the sum of the cost of the first 50 units sold and the cost of the remaining 50 units sold.

Total cost of goods sold = Cost of first 50 units sold + Cost of remaining 50 units sold
Total cost of goods sold = $600 + $500
Total cost of goods sold = $1,100

Q: What are the limitations of the LIFO method?

A: The LIFO method has several limitations, including:

It does not accurately reflect the cost of goods sold.
It assumes that the most recent purchases are sold first, which may not be the case in reality.
It can result in a lower cost of goods sold, which can be beneficial for tax purposes, but may not be desirable.

Q: What are the alternative methods to the LIFO method?

A: There are several alternative methods to the LIFO method, including:

First-In, First-Out (FIFO) Method: This method assumes that the oldest purchases are sold first.
Weighted Average Cost (WAC) Method: This method calculates the average cost of the inventory based on the cost of the purchases and the quantity of the inventory.
Specific Identification Method: This method requires that each item of inventory be identified and valued separately.

Q: Why is the LIFO method not allowed in the International Financial Reporting Standards (IFRS)?

A: The LIFO method is not allowed in the IFRS because it does not accurately reflect the cost of goods sold. The IFRS requires that the cost of goods sold be calculated using the FIFO method or the WAC method.

Conclusion

References

American Institute of Certified Public Accountants (AICPA). (2022). Accounting Standards Codification (ASC) 330, Inventory.
Financial Accounting Standards Board (FASB). (2022). Accounting Standards Codification (ASC) 330, Inventory.

Additional Resources

AICPA. (2022). Inventory Accounting.
FASB. (2022). Inventory Accounting.

Final Answer

The final answer is: $1,100