Question

Calculation of ending inventory and cost of goods sold

Exquisite Jewellers purchases chiming clocks from around the world for sale in Canada. According to its records, Exquisite Jewellers had no opening inventory, and had the following purchases and sales of clocks in the current year:

Clock No.Date PurchasedAmount Paid Date SoldSale Price $2,150 4,500 4,400 2,400 3,720 1,930 $3,800 423 424 425 426 427 428 Jan. 5 Mar. 15 May 27 July 14 Oct. 24 Dec. 5 Mar. 8 June 16 6,200 Aug. 9 3,350 Dec. 24 2,640

Exquisite Jewellers uses the specific identification cost formula. The company uses a perpetual inventory system.

Problem:

a. Calculate Exquisite's cost of goods sold and ending inventory.

b. What conditions generally must exist for specific identification to be used? Are these met in this case? Explain.

c. Exquisite's management are wondering if they could use the weighted-average cost formula, as they figured it would be easier. Is this possible?

Answer 1

a) Cost of goods sold = Clock No. 423+Clock No. 425+Clock No. 426+Clock No. 428

= $2,150+$4,400+$2,400+$1,930 = $10,880

Ending inventory = Clock No. 424+Clock No. 427

= $4,500+$3,720 = $8,220

b) The principal requirement of a specific identification

• Be able to track each inventory item individually.
• Be able to track the cost of each item individually. The accounting system should clearly identify the cost of each purchased item, and associate it with a unique identification number.
• Be able to relieve inventory for the specific cost associated with an inventory item when it is sold.

All the Clocks have a unique identification number such 423,424 etc. All the clocks can be tracked individually for their cost. Hence all the requirements for specific identification are met in this case.

c) The calculation of weighted average price may be easier but use of weighted average cost in this case is not suitable since each clock sold has its unique identification number and can be easily identified. Therefore it is better to use specific identification method for valuing cost of goods sold and inventory.