Client Understanding

In: Business and Management

Submitted By gbetjr
Words 1180
Pages 5
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 future benefit (Schroeder, Clark, & Cathey 2011). The biggest issue with the LCM rule is that it only recognizes losses that are held and gains are ignored. The FASB feels that by only recognizing losses the concept of conservatism will be maintained. Also, the use of LCM causes expenses to be understated in the period of sale because inventory is reported at an expected utility…...

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