Client Response

Client Response Week 2

Sarah Harris

ACC/541

June 18, 2012

Jacob Matthews

Client Response Week 2

Mr. Smith, thank you for your continued loyalty as a customer at H & H Accounting firm. It is our goal to not only be a trusted advisor for accounting needs but to ensure that we help you reach your goals in all aspects of your business. As you know, we take our client’s questions and concerns very seriously and we are anxious to answer all of your questions concerns to your upmost satisfaction. Outlined below are explanations and answers to each of your four areas of concern.

Lower Cost of Market Inventory Valuation

Lower cost of market is an accounting valuation method that is used to report downward adjustments in inventory valuation. The term market, in this rule, means current replacement costs. The rule can be restated as lower of cost or current replacement costs. This rule is referenced in pronouncement Accounting Research Bulletin No. 43 and is based on the conservatism principle (Accounting Coach, 2012). This principle allows us, as your accountants, the guidance between decisions on how to choose amounts that may result in a smaller asset amount versus less profit. The principle will also lead us in deciding whether items should be reported at actual cost or replacement costs when the costs of the inventory exceed its expected benefit (J. David Spiceland, 2011).

When deciding on how to determine the use of the actual cost or replacement costs, we must know three additional figures to the actual cost, they are: the net realized value, what our upper limit, referred to as the ceiling, and lower limit, the floor is. If the replacement cost is between the floor and ceiling, we will use the market amount of the item. If the replacement cost is greater than the ceiling, the ceiling amount is used and if the replacement cost is lower than the floor, the floor amount is used (Schroeder, 2011). To put this more simply, the lower cost or market is, the...