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What Is the Specific Identification Inventory Valuation Method?
The specific identification inventory valuation method is a system for tracking every single item in an inventory individually from the time it enters the inventory until the time it leaves it. This distinguishes the method from LIFO or FIFO, which groups pieces of inventory together based on when they were purchased and how much they cost.
In the specific inventory method, each item is tagged with its purchase cost and any additional costs that are incurred until it is sold.Understanding Specific Identification Inventory Valuation Method
Specific identification inventory valuation is often used for more expensive items such as furniture or vehicles. It also is used when the products stored have widely different features and costs.Key Takeaways
- The specific identification inventory valuation method is used to track each purchase and its price individually.
- When used for inventory management, it provides more useful information on sales.
- When used for tracking investments, it can reduce capital gains taxes due.
Examples of Specific Identification Inventory Valuation Method
Example 1
Suppose a car dealership has 50 cars on the lot. Each car has a different dealer cost and a different sales price based on the model and its features. Each of the cars is tracked individually from the time they enter the lot until they are sold. In this case, the benefits are clear. The owner of the dealership gets a far more useful stream of information about the models and the features that are most popular with its customers.Example 2
This level of detail also can be useful for tax harvesting. Say an investor owns 1,000 shares of ABC company, a volatile small-cap manufacturer. It includes 400 shares purchased for $40 per share, 300 shares at $60 per share, and the remaining 300 shares at $20 per share.
The investor then sells 300 shares at $70 per share. At tax time, using the method described above, the investor can easily match up the shares sold for $70 with the most expensive of the shares purchased (for $60 per share). The taxable capital gains due are thus minimized.