...Client Understanding Paper Client: The ADT Corporation Lydia Ferdin I thank you for the opportunity to work with The ADT Corporation on this important project. As I was analyzing the papers provided, I realized that additional information is requested by your representatives. It was brought to my attention that ADT and its affiliates are unclear about why the additional information was requested on the adjusting lower cost of market inventory on valuation, the capitalizing interest on building construction, the recording of gains or losses on asset disposal, and the adjusting goodwill for impairment. The adjusting lower cost of market inventory on valuation is specified in Accounting Research Bulletin No. 43 (ARB No. 43). The Statement of Financial Accounting Standards (SFAS) No. 34 is the statement, which deals with capitalization of interest as part of the cost of the asset. The SFAS No. 144 addresses the reporting and accounting for the impairment of the disposal of long-lived assets. New rules for the accounting for goodwill have been addressed in SFAS No. 142. To be able to complete the analysis of the work papers of my clients’, certain information must be obtained. To alleviate the concern of the client of why the information is requested analysis of each topic and its importance will be discussed in this paper. The adjusting lower cost of market inventory valuation is essential because through the life cycle of inventories, the inventories will decline in value...
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...Client Understanding Paper Recording gain or loss on asset disposal The work papers of the company should show how the company calculates for gains and losses on asset disposal. Assets can be disposed of by discontinuing use in operations, selling or exchanging. When assets are disposed of, entries are made on the books to recognize any unrecorded depreciation expense to the disposal date, cost of the asset and accumulated depreciation are removed from the books. When disposal happens, gains and losses associated with disposal of the asset, for example, if a building is sold, are recorded in a separate account and appear in an area of the income statement of the company listed as other income/expense, net. As stated in the Statement of Financial Accounting Standards No. 144 (SFAS No. 144), The results of operations of a component of an entity that either has been disposed of or is classified as held for sale shall be reported in discontinued operations in accordance with paragraph 43 if both of the following conditions are met: (a) the operations and cash flows of the component have been (or will be) eliminated from the ongoing operations of the entity as a result of the disposal transaction and (b) the entity will not have any significant continuing involvement in the operations of the component after the disposal transaction (fasb.org, 2010, p. 17.) A gain is not recorded whenever an asset is discontinued from operation. A loss can be recorded if the asset has not been...
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...Client Understanding Paper Colleen Witten ACC/541 11/11/2013 Thomas Gruber 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 are all areas in which numbers on a financial statement can be distorted. There are rules and regulations regarding each one that a company should follow and auditing of these areas is necessary for financial statement compliance. Any organization must recognize that the GAAP is an ever evolving set of regulations and standards that should be followed. Using the lower cost of market is defined as comparing the market value of each fixed asset with its cost and then using the lower of the two as an inventory value. (FASB ASC 30-10) Cost is defined as how much a company pays for an item if it purchases the item or how much it cost the company to manufacture the item. The market (How to Use Lower Cost of Market, 2012) value of an item is usually its replacement cost; unfortunately replacement cost is not always an accurate number to use. The net realizable value is the expected selling price of an item minus any selling cost or costs to complete the item, which will inflate the replacement cost. Replacement Cost can also be lower than it should be when the net realizable value minus the normal profit is placed on an item. The GAAP requires that all inventory that is in reserve being stated and value at either the cost...
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...Running head: Client Understanding Client Understanding Paper Letitia Edwards University of Phoenix July 1st, 2013 Professor Boswell Abstract 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...
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...Client Understanding I am excited to be working with your organization to improve the financial practices. After reviewing the firm’s financial records there are a few additional items needed to complete the accounting evaluations. The additional items being requested are adjusting lower cost of market inventory, recording gain or loss on assets, adjusting goodwill and capitalizing interest on building construction. I understand the firm is concern with why the additional information is being requested. Each requested item will be discussed in detail to ensure the organization understands how these accounting practices will improve the entire firm. Adjusting lower cost of market inventory on valuation Originally the lower of cost or market (LCM) method, was defined by reporting only downward adjustments in the value of temporary investments (Schroeder, Clark, & Cathey, 2011). Ending inventory is stated as the historical cost, which can be higher than the cost of replenishing inventory. The higher historical cost will be reported on the balance sheet. In this case the cost is reported as the current market value (Elmaleh, 2007). This concept is relevant because the higher cost is reported as a loss and a decrease in the cost of goods sold. Selling inventory will require the firm to record several transactions that will create cost and adjusting entries. “GAAP requires that inventory must be carried on the books and reflected on the balance sheet at the lower of cost or...
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...Client Understanding Paper Cayce Harris ACC-541 December 23, 2013 Thomas Gruber Cayce Harris 715 Madison Ln. Florissant, MO 63031 December 23, 2013 Client Understanding CEO CU Corp. 12345 S. Main St. St. Louis, MO 63031 Dear Client: Thank you for choosing University Accounting for your accounting needs. We are confident that you will be very satisfied with the services that we offer. The information enclosed will help you make the most of our services, as well as, address your questions we discussed previously. If you have any further questions or concerns, please contact us. I can be reached at (314)555-5555 or by email at cayce.harris@universityaccounting.org. Your account number is 123456789. When you call, please have it handy so that we can expedite your requests. As your needs change, I will be happy to help you evaluate those needs and give you the services that will help you achieve your new goals. Again, thank you for choosing University Accounting. Sincerely, Cayce Harris Staff I Enclosure Explanation of Services Offered Adjusting Lower Cost of Market Inventory on Valuation: The lower of cost or market (LCM) is defined as the following, “At the end of an accounting period, a convention used to mark the current value of remaining inventory. Under this convention, the inventory is recorded as either the historical cost (what the company originally paid) or the fair market value (what the inventory is now worth), whichever is lower. A...
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...Clients Understanding Binu David, Dana Blacks, and Deborah Stuker ACC541 University of Phoenix Prof. JoEtta Lower cost of Market method can be used to avoid overstatement and understatement of the inventory. Prices of inventory after purchase can fluctuate, so listing the actual purchase price wouldn’t be accurate. By using the replacement cost in comparison to the price ceiling and price floor, a more accurate picture can be developed. The price ceiling is the highest the price that should be listed for the asset. The price ceiling can be calculated price and subtract the competition cost and disposal cost. By using this formula, a more realistic valuation of the inventory can be recorded. The pricing floor can be calculate taking the sales price and subtracting the profit. Capitalizing Interest on Construction Approaches for Capitalizing Interest When a company decides to construct an asset, it is often necessary to procure outside debt financing. According to Kieso, Weygandt, and Warfield (2010) there are three approaches to capitalizing the interest incurred on such financing: interest is expensed rather than capitalized, capitalize all associated costs whether traceable or not, and capitalize only the directly traceable interest amounts (p. 491). The most appropriate approach depends on numerous factors. However, Schroeder, Clark, and Cathey (2011) suggest capitalizing only the actual interest costs directly related to the constructed asset is appropriate...
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...Client Understanding Paper ACC/541 January 30, 2012 Client Understanding Paper Dear Sir: In order to ensure that your organization is following the FASB’s generally accepted accounting principles (GAAP) it is necessary that I review the current practices being used by your organization with regards to lower of cost or market valuation, capitalizing interest on building construction, recording gain or loss on asset disposal, and adjusting for goodwill impairment. It is important for me to know that you and your organization understand the importance of understanding how these issues affect the reliability of your financial statements. I will briefly explain the impact and shortcomings that each of the listed items have on your financial statements and the importance of ensuring that these items are correctly accounted for. GAAP maintains that when the value of inventories go down so does the future selling price and the anticipated losses should be reported in the same period as the inventory value decline. The lower of cost or market (LCM) should be used by your organization to value inventories. The AICPA has stated that market (current replacement cost) should not be greater than the net realizable value and market should not be less than net realizable value reduced by an allowance for an approximately normal profit margin. In other words, reducing the value of inventory to market value when its cost exceeds its expected benefit gives a better measure of its expected...
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...Client Understanding Paper Jason Green ACC541 2/3/2014 Leslie Crews Client Understanding Paper As a new staff member at the firm, it is important to be able to audit past accounting practices to make sure accounts are in compliance with Generally Accepted Accounting Principles (GAAP). This review is being done to protect our clients and make sure fair reporting and valuation of business is attained. Please provide the requested information based on these following four areas: adjusting lower of cost or market on valuation, capitalizing interest on building construction, recording gain or loss on disposal of an asset, and adjusting goodwill for impairment. Following is a detailed explanation of each of these four areas and an explanation of their importance in fair value of a business. Lower of Cost or Market Lower of cost or market is one approach for inventory valuation that may be preferred by some companies. This methodology accounts for current assets to be valued at the current market rate or purchase price, whichever is lower. The theory behind this is if the value of inventory goes down, it is more than likely that the sale price of such inventory will go down as well (Schroeder, Clark, & Cathey, 2011). One identified issue with this practice is that it revalues assets based on losses on market value but the practice is not consistent with price increases. Schroeder, Clark, & Cathey went on to explain that when there is a sale of inventory "normal profits"...
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...Client Understanding Kelly Ableman ACC/541 August 5, 2013 Jonathan Rubin As a newly hired Staff I, the responsibilities that are required are to analyze the work papers for one of the clients of the organization. This client is not clear about why the company is asking for information on the following topics: adjusting lower cost of market inventory on valuation; capitalizing interest on building construction; recording gain or loss on asset disposal; and adjust goodwill for impairment. This paper will strive to answer these questions for the client. Adjusting Lower Cost of Market Inventory on Valuation One of the requirements of the Generally Accepted Accounting Principles (GAAP) is that inventory be recorded at lower of cost or market rule, also known as LCM. In a company’s’ financial statements, assets are generally stated in the financial statements according to the cost principle. However, when it comes to inventory, cost principle is abandoned and lower of cost or market rule takes its place. The LCM states that inventory should be measured at the lower of cost or market value (Accounting Explained). What market value means basically is the replacement cost of the company’s inventory. This replacement cost can be in the form of a purchase cost or a manufacturing cost; simply stated, market value is the amount a company would have to pay to acquire their inventory of the same quantity and quality through purchase or through manufacturing. There are upper...
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...Client Response II ACC/541 January 31, 2011 Client Response II To: ABC Warehouse CC: Date: [ 1/31/2011 ] Re: Loss Contingencies Reporting Requirement for Lawsuit Contingencies The implication to the company depends upon outcome of the lawsuit. If the outcome results in a loss to the company, the loss should be accrued as estimated into the company’s financials, provided that the loss can be reasonably estimated and noted, in detail per FASB Codification section 450-20-25-2. If the loss cannot reasonably estimated, FASB Codification section 450-20-50-5, states that in the company’s financial statement there should be a disclosure of the contingency outlining conditions which could possibly result in an additional loss. If the litigation is unlikely to result in a loss, the Codification of FASB section 450-20-50-6, requires no disclosure in the financial statement. Reporting requirement for Debt Reorganization If there is an unfavorable outcome in the pending litigation, the cash flow of the company may become distressed to the point where the company may sue for relief under chapter 11 bankruptcy code for debt reorganization. There is a detailed method for creditors, provided by the bankruptcy plan of the organization suing for relief, to recoup funds allocated to the company through the restructuring of the company’s debt . In the restructuring of the company’s debt, it may result in modified repayment schedules, debt forgiveness, modification...
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...Client Understanding Paper 541 ACCOUNTING THEORY AND RESEARCH Client Understanding Paper As a newly hired Staff I, you are responsible for analyzing the work papers for one of the clients of your organization. Your client is not clear about why you are asking for information on the following topics: Adjusting lower cost of market inventory on valuation “The conservatism principle and a specific accounting pronouncement, Accounting Research Bulletin No. 43 (ARB No. 43) leads to an accounting valuation method known as the lower of cost or market, or LCM. In this method the term "market" includes both the market in which the company purchases its merchandise as well as the market in which it sells its merchandise.” (Arverkamp, 2013) The Lower of cost or market aspect (LCM) is also supported and defined by SFAC No. 2 and SFAC No. 6. The LCM rule considers the market that purchases and sells the inventory. Capitalizing interest on building construction Under FASB 34, companies must capitalize interest on construction projects. Interest cost should be capitalized as part of the historical cost of acquiring certain assets. The interest cost eligible for capitalization in most situations would be the interest cost recognized on borrowings and other obligations. The amount capitalized is an allocation of the interest cost incurred during the period required to complete the asset. This interest rate for capitalization purposes should be based on the rates...
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...Client Understanding Paper ACC541 September 16, 2013 Client Understanding Paper I am happy to get the opportunity to work with your company on this assignment. I have analyzed the working papers, and have submitted some supplementary information as requested. I understand that there are some questions as to why the information has been asked for in reference to the adjusting lower cost of market inventory valuation, capitalizing interest on building construction, the recording of gain or loss on asset disposal and the adjusting goodwill for impairment. I will be providing you with responses to your questions and have no doubt the answers will give you a better understanding on some of the accounting practices that may help increase the organization’s familiarity and practices from this analysis. Adjusting Lower Cost of Market Inventory on Valuation ARB No. 43 addresses the concern of inventory adjustments to lower of cost or market. GAAP maintains that the potential selling price will progress in the same direction and that probable future losses should be reported in the same period as the inventory decline. Companies should use the lower of cost or market method to value inventories. The AICPA has provided a definition to use in applying the LCM rule. As used in the phrase lower of cost market the term market means current replacement cost. Market should not exceed the net realizable value and market should not be less than net realizable value reduced by an allowance...
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...Client Understanding Ken Smith ACC/541 June 02, 2014 Dominick Margarella Client Understanding Mr. Wentworth, this firm in trusted in me a clarified to you the understanding of four important points that will enhance your skills even more as you work at ABC Financial Standards Incorporation. Our amazing staff well encourage you to perform at your honest best meeting with the Securities and Exchange Commission (SEC) which is a government agency, The Financial Accounting Standards Board (FASB) is a private organization in the United States, and working with accountants who are licensed to serve the general public rather than one particular company are called Certified public accounts. (Horngren, Harrison, Bamber, Accounting, 5th edition pg. 7). The four points that will be address to you is 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. Inventory Valuation Methods are First-in-Last-out (FIFO), Last-in-First out (LIFO) and Average Cost Method. These method are designed to calculate the cost of goods sold and cost of ending inventory. An explanation of the inventories valuation method are as follow: FIFO is assumed that items from the inventory are sold in the order in which they are purchased or produced. Purchase is of an out let as a store (Item) Produced is of a manufactory (Raw Material) With LIFO method inventory is sold first and...
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...Client Understanding Paper Tanisha Wilson University Of Phoenix Accounting Theory and Research ACC/541 Bethany Bartlett August 19, 2013 Client Understanding Paper To our valued clients at Morton Sales Company, It is my pleasure to have the opportunity to assist your organization with your financial needs. As I was analyzing the working papers given, a request for some additional information needed was submitted. It has been conveyed to my attention that there is questions or concerns in regards to why the information was requested. The concerns include the reason for the adjusting lower cost of market inventory valuation, the capitalizing interest on building construction, the recording of gain or loss on asset disposal, and the adjusting goodwill for impairment. Please rest assured that we will do our best to answer your questions and settle your concerns with anticipation that your trust will be gained and our relationship will flourish tremendously. The Financial Accounting Standards Board (FASB) established clear guidelines that address all the items in question. A clear outline of the FASB generally accepted accounting standards (GAAP) will be given for each item stated above, and how these improvements to Morton Sales Company will help improve Morton Sales Company financial health. Lower Cost of Market The issuance of the ARB No. 43 by The American Institute of Certified Public Accountants (AICPA) and the Financial Standards Accounting Board (FASB) states...
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