Client Understanding Paper Acc 541

Client Understanding Paper

In order to follow Generally Accepted Accounting Principles (GAAP) established by the Financial Accounting Standards Board (FASB), it is important that we have accurate information about certain items and follow certain rules. An explanation as to why each of these is necessary is contained here. We want to make sure that you understand the reasons why we are doing certain things. We will also provide examples with the explanations and hope that these will assist in your understanding.

Adjusting lower cost or market on inventory valuation

When valuing inventories, there are several methods that can be used. The first is the

First In, First Out (FIFO) method. Using this method, the first items purchased would be the first items that would be removed from inventory. Another method is the Last In, First Out (LIFO) method. This method removes the items most recently purchased from the inventory first. A third method would be using average values of the inventory (Kimmel, Weygandt, & Kieso, 2007).

The lower of cost or market valuation is sometimes used. This occurs when the value of the inventory falls below the cost of the inventory. How this works is if you have a product that you purchased for $10 normally the value of the product in inventory would be $10. If, however, the replacement cost or if the market value of the product drops to $8, we would adjust the value of the inventory to the $8. These would be the figures we would report on the financial statements (Ijiri & Nikano, 1989). This also assists in using conservative figures when preparing our reports rather than overstating the value of the assets (Schroeder, Clark, & Cathey, 2011).

Capitalizing interest on building construction

Often we will need to purchase property such as buildings. Sometimes these buildings will already be constructed and other times we will need to construct the building. Special circumstances must be considered when we construct a...