Chapter 8
Inventory Valuation
227
Date
Transaction
Quantity Unit Cost
March 5 Purchase from Pen Distributers
50
$12
March 7 Sale
15
March 15 Purchase from Promotional Pens
40
$14
March 19 Purchase from Promotional Pens
20
$16
March 27 Sale
50
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FIGURE 8.1
During the month, the cost of the pen increased as shown from the Unit Cost column.This means
that the cost of goods sold applied to each sale will likely be different, based on which pens are
actually sold. We can apply the three methods of valuing inventory to the transactions to arrive
at different values for inventory and cost of goods sold. This will demonstrate that the choice of
inventory valuation method can make a difference on the financial statements of a company.
Specific Identification Method
The specific identification method is used when a company sells goods that are unique in some way
and can be distinguished from each other. For example, a jewellery retailer may use this method to
value its gold products because its costs can fluctuate significantly.
When using specific identification, it is helpful to list the purchases separately from each other to
easily identify the costs associated with each batch of inventory. This is done by using a table as
shown in Figure 8.2. The opening balance and the transactions from Figure 8.1 are listed in the
table. Purchases cause the balance of inventory to increase and sales cause it to decrease. At the
bottom of the figure is the value of ending inventory.
Date
Purchases
Sales
Balance
Quantity Unit Cost Value Quantity Unit Cost Value Quantity Unit Cost Value
March 1
10
$10
$100
March 5
50
$12
$600
10
$10
$100
50
$12
$600
March 7
8
$10
$80
2
$10
$20
7
$12
$84
43
$12
$516
March 15
40
$14
$560
2
$10
$20
43
$12
$516
40
$14
$560
March 19
20
$16
$320
2
$10
$20
43
$12
$516
40
$14
$560
20
$16
$320
March 27
2
$10
$20
33
$12
$396
10
$12
$120
15
$14
$210
25
$14
$350
20
$16
$320
Ending Inventory
$790
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FIGURE 8.2
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