Client Understanding

Client Understanding
Theresa Gibbs
August 20, 2012
Leslie Crews

Client Understanding
As a new hire responsible for analyzing the working papers of additional information   request will aid in the analysis. The information requested is the adjusting lower cost of market inventory, capitalizing interest on building construction, recording gain or loss on asset disposal, and adjusting for goodwill. The following is an explanation of why the information is necessary to complete the analysis.
Adjusting Lower Cost of Market
“To ensure the proper matching of expenses and revenues, decreases in the value of inventory due to usage, damage, deterioration, obsolescence, and other factors must be recognized in the accounting period during which the decreases occurs rather than the period during which the merchandise sells” (John Wiley & sons Inc., 2012, p. 1). How a company values inventory is important for two reasons. First, inventory is a major portion of current assets and has an impact on working capital and the company’s financial position. Second, valuation has an immediate and major impact on net profits. Because market values fluctuate inventory costs can increase resulting in lower profits. Using the lower of cost or market values is a conservative way to value inventory and is consistent with SFAC No. 2 (qualitative characteristics of accounting information) and SFAC No. 6 (assets and losses definitions).   “That is, when the cost of inventory exceeds its expected benefit, a reduction of the inventory to its market value is a better measure of its expected future benefits” (Schroeder, 2011, p. 268).   To prevent inflated earning of the same period testing is required annually by Generally Accepted Accounting Principles (GAAP) to adjust inventory balances to LMC.   If replacement costs are less than historical costs, inventory is adjusted to reflect decrease, and a loss is recorded. If the replacement costs are higher, the inventory remains at...