Answer
Specific identification requires that every item that is in the inventory or one that is sold off is identified. The application of specific identification requires that the purchase be physically distinguished. Consequently, most entities that utilize specific identification deal with expensive items, such as furniture, jewellery, fur clothing, etc.
FIFO: Under the manufacturing settings, the FIFO method entails utilizing those goods that were bought first. Under merchandising settings, the FIFO method entails selling the stock that was procured first before that which was procured recently. FIFO works well in the estimation of how physical goods are flowing through an entity. However, FIFO does not effectively match all the costs and revenues in the current period’s income statement.
LIFO: The recent purchases make up the quantity of goods that are sold off. Thus, the revenue is matched against the goods that were bought last.
Average cost: The average cost is computed by dividing the total costs of all goods in a particular category by the total units. The average cost methodology is objective, and applying it is straightforward. Moreover, the average cost methodology rises above the manipulation of income that is inherent in other methods of valuing inventory.
Work Step by Step
Specific identification requires that every item that is in the inventory or one that is sold off is identified. The application of specific identification requires that the purchase be physically distinguished. Consequently, most entities that utilize specific identification deal with expensive items, such as furniture, jewellery, fur clothing, etc.
FIFO: Under the manufacturing settings, the FIFO method entails utilizing those goods that were bought first. Under merchandising settings, the FIFO method entails selling the stock that was procured first before that which was procured recently. FIFO works well in the estimation of how physical goods are flowing through an entity. However, FIFO does not effectively match all the costs and revenues in the current period’s income statement.
LIFO: The recent purchases make up the quantity of goods that are sold off. Thus, the revenue is matched against the goods that were bought last.
Average cost: The average cost is computed by dividing the total costs of all goods in a particular category by the total units. The average cost methodology is objective, and applying it is straightforward. Moreover, the average cost methodology rises above the manipulation of income that is inherent in other methods of valuing inventory.
