Client Understanding Paper
January 13, 2014
As the new staff handling your account, I am charged with analyzing your organizations’ work papers. In order to complete analysis of the work documents there is additional information needed. The information needed is under the topics of (a) adjusting lower cost of market inventory on valuation, (b) capitalizing interest on building construction, (c) recording gain or loss on asset disposal, and (d) adjusting goodwill for impairment. To reduce the client’s concern regarding why the information is being requested each topic and why it is important will be discussed further in this document.
The adjusting lower cost of market inventory valuation is important because through the life of inventory, the value decreases. “Inventory refers to all the goods and materials, which are held for sale to increase revenue. This includes item held for sale in ordinary business, in the process of production of sales, and currently consumed in the production of goods of services to be available for sale” (Schroeder, Clark, & Cathey, 2011, p. 264). There are some that feel inventories should be priced at the current market, and assets should be priced at current values. The GAAP argues that as inventory value decline, the future selling price should also decline and be reported in the same period as the decline. “The AICPA established definitions to use when applying the lower cost or market rule to inventory:
1. The market should not exceed the net realizable value
2. The market should not be less than net realizable value reduced by an allowance for an approximately normal profit margin” (Schroeder, Clark, & Cathey, 2011, p. 268).
Using the lower cost or market inventory adjustment valuation fulfills the guidance shown in the SAFC No. 2 qualitative characteristics of account information and the definitions provided in SFAC No.6 assets and losses (Schroeder, Clark, & Cathey, 2011, p. 268). Some are...