Client Understanding Paper
University of Phoenix
July 1st, 2013
One of the most important responsibilities of accounting personnel is to ensure compliance with Generally Accepted Accounting Principles. To ensure compliance, a new employee would need to review the firms’ current financial statements and get clarification if needed.
Client Understanding Paper Reorganization of personnel is almost a constant factor with organizations. In terms of the financial statements, new employees/accountants need to gain understanding on company policy of stating transaction. For this paper we wanted to discuss four key factors: Adjusting lower cost of market inventory on valuation, Capitalizing interest on building construction, Recording gain or loss on asset disposal, and Adjusting goodwill for impairment. To explain to the client why this information is important, we will discuss each topic.
First we decided which topic we would do our research on, and then we assembled all the data and analysis to create this paper.
Adjusting lower cost of market inventory on valuation: Ending inventory in one accounting period will automatically become the beginning inventory for the next. For that reason and others, it is important to keep accurate information. Lower of cost or market refers to the valuation process that may result in an asset that can be reported at an amount lower than cost. The dollar amount of inventory is usually the cost of the item. When there is inventory left over, it still has to be accounted for on the balance sheet, likely at a lower cost. If the market value is lower than the cost of the inventory, a loss can be reported on the balance sheet. Adjustments are made for inventory lost, deteriorated or not salable at the regular price. For example, if a company is selling headphones at $50 and the market price drops to $35, an adjustment of $15 must be made on the balance sheet. We would have to debit $15 as decline in market value and credit inventory $15. If a company fails to adjust their inventory when necessary, the information on the balance sheet would be distorted.
Capitalizing interest on building construction: Capitalizing interest on building construction applies to assets still “under construction,” If the company bought land and started construction to build their new management building, they have to claim interest expense incurred under FASB ASC 835-20. Interest can be calculated only on the construction expenses, i.e. the total amount that the company will spend to “get the asset ready for its intended use”. So, if the company paid $100,000 cash to buy land and borrowed another $150,000 at 10% interest to complete the construction of the building, and it would take nine months for completion, the interest payable on the $11250 for those nine months would be capitalized.
The argument here is that if the company bought an office building the interest expense would be included in the cost of the building, thus included in the value of the building.
As a new employee, one would like to verify the cost of the building includes any interest that needed to be capitalized. One would also verify the value of the building is correct and not understated because this would affect the depreciation value of the building as well.
FASB ASC 835-20 clearly states that interest capitalization for inventory that is manufactured for sale is not to be included. Also assets in use or are not prepared for use are also excluded.
Recording gain or loss on asset disposal: Many firms find a need to sell or destroy their capital assets during the life of their business. The reasons for disposal of capital assets would be that the company may want to raise some funds to finance operations or the company may just want to replace assets that have outlived their useful lives (Disposal of…