Client Understanding Paper
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- Date Submitted: 02/20/2011 01:44 PM
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Client Understanding Paper
After reviewing the financial papers of ABC Company, XYZ Accounting Inc. sent a request for more information and have been asked to clarify the need for the following information: lower of cost or market inventory valuation, capitalizing interest, gain or loss on asset disposal, and goodwill impairment. This paper is an explanation of the requested information.
Inventory valuation
Inventory usually accounts for a significant part of any company’s current assets, and to maintain accurate financial statements, it is necessary to measure properly ones inventory. The value of inventory is directly related to the cost of goods sold, and therefor affects the company’s working capital and net income. When valuing inventories it is necessary to know three things (1) the quantity of goods on hand, (2) the cash flow assumption from that inventory and (3) the market value of the inventory. The inventory quantity can be acquired by a physical count, perpetual records, or an estimate. There are four methods used to calculate cash flow assumptions, first-in first-out (FIFO), last-in first-out (LIFO), specific identification, or cost averaging. To avoid misleading investors, it is important to value the market value of inventory conservatively (Schroder, Clark, & Cathey, 2005).
The lower of cost or market value (LCM) method as outlined in the Financial Accounting Standards Board (FASB) statement SFAC No. 2 is a conservative way to value inventory. This is a method, which uses the lower of either (1) the cost of the asset or (2) the market price or replacement cost of the asset to value inventory. For example, if a company purchases 20 computers for $600 a computer and a month later the computer manufacture introduces a new model of computer, the model the company purchased is then worth $400. The company will value the computers at $400 rather than $600, and report an inventory value of $8,000.
Capitalizing Interest
In addition...
After reviewing the financial papers of ABC Company, XYZ Accounting Inc. sent a request for more information and have been asked to clarify the need for the following information: lower of cost or market inventory valuation, capitalizing interest, gain or loss on asset disposal, and goodwill impairment. This paper is an explanation of the requested information.
Inventory valuation
Inventory usually accounts for a significant part of any company’s current assets, and to maintain accurate financial statements, it is necessary to measure properly ones inventory. The value of inventory is directly related to the cost of goods sold, and therefor affects the company’s working capital and net income. When valuing inventories it is necessary to know three things (1) the quantity of goods on hand, (2) the cash flow assumption from that inventory and (3) the market value of the inventory. The inventory quantity can be acquired by a physical count, perpetual records, or an estimate. There are four methods used to calculate cash flow assumptions, first-in first-out (FIFO), last-in first-out (LIFO), specific identification, or cost averaging. To avoid misleading investors, it is important to value the market value of inventory conservatively (Schroder, Clark, & Cathey, 2005).
The lower of cost or market value (LCM) method as outlined in the Financial Accounting Standards Board (FASB) statement SFAC No. 2 is a conservative way to value inventory. This is a method, which uses the lower of either (1) the cost of the asset or (2) the market price or replacement cost of the asset to value inventory. For example, if a company purchases 20 computers for $600 a computer and a month later the computer manufacture introduces a new model of computer, the model the company purchased is then worth $400. The company will value the computers at $400 rather than $600, and report an inventory value of $8,000.
Capitalizing Interest
In addition...