Client Understanding Acc 541

Client Understanding

Accounting is a vast and complex universe in which one can get lost without taking a step forward if the proper foundation and understanding are not in place. In the United States the use of Generally Accepted Accounting Principles provides the definitions and guidance to find the way. As a client this paper will give you a brief understanding of principles and how they will be applied that will be seen on your financial statements for the year end. These topics covered include; adjusting to lower cost of market inventory on valuation, capitalization of interest on building construction, recording the gains or losses upon asset disposal, and the adjustments for goodwill.

For a company that so chooses to use the lower cost of market method in accounting for inventory price and reporting, adjustments will occur to ensure accuracy for the financial statements. Across the board, accounting requires the use of conservatism. Conservatism requires the report of the lower of two choices in an effort to provide a true picture of the financial data. The lower cost of market or LCM method attempts to do this by reducing the cost of inventory to historical cost or current market value whichever is lower. This follows GAAP rules which require that inventory be recorded at lowest of production costs, repurchase cost, or market value (Scheid, 2011).

Many reasons can be attributed to inventory value lowering; inventory may become obsolete as newer technology becomes available. This is seen with the computer industry quite often as the chip that cost $1000 at the beginning of the year will drop significantly each quarter and also occurring in retail when the seasons change. Another reason is deterioration, over time inventory that is sensitive will become damaged and a reduction is made to indicate an accurate price of the inventory. There is a relation to lower market cost and reduced selling price which equals less profit. When that occurs GAAP has...