Paper

Client Understanding Paper

Rebel McClenney

ACC541

May 2, 2011

Michael Meyer

Client Understanding Paper

In preparing the work papers for a client’s annual income tax return, information has been requested regarding some issues. The client does not understand why the information is needed. In an effort to better educate the client in these matters and to provide a well-rounded service, the following explanations have been provided for the topics in question: adjusting to lower of cost or market for inventory, capitalization of interest on building construction, recording gains/losses on asset disposals, and adjusting goodwill for impairment.

Lower of Cost or Market

Accounting consists of some generally accepted accounting principles (GAAP). One of these is the conservatism principle. This principle helps accountants when they are faced with two alternatives for reporting an item, in this case inventory (Averkamp, n.d.). The conservatism principle “directs the accountant to choose the alternative that will result in less net income and/or less asset amount” (Averkamp, n.d., para 26).

The client has had a significant decrease in market value of their inventory. This is evident by recent published pricing from various competitors for similar items. Also, attempts to sell the inventory to customers for cost have not met with any success. The client was asked about this change in value and it was determined that the change was permanent. Competitor pricing and the new customer pricing were provided to support this conclusion. Based on the conservatism principle, it was explained to the client that adjusting the value of the inventory to the lower market price would be acceptable.

Capitalization of Interest on Building Construction

The client is currently in the process of building a new corporate headquarters building. It has been determined while reviewing the client’s year-end financial statements that interest on the construction loan has been expensed....