Client Understanding Paper

Memorandum

To: Client

From: Staff I at Walker & Associates

Date: May 6, 2013

Re: Client understanding

Mr. Client, my name is Tony Renos and I am the Staff worker at Walker & Associates that is responsible for analyzing the work papers of your organization. There is a lot of information needed and I understand you have some questions. I want to go over some of the information I need to complete this process.

Adjusting lower cost of market inventory on valuation

Accounting ethics necessitate that inventory be reported at the market value or cost of replacing inventory when market value is lower than cost. Merchandise is then said to be reported on the balance sheet at the lower of cost or market (LCM) (Larson, Wild, & Chiappetta, 2005). The inventory valuation is very significant because inventory has a major effect on working capital and your company’s current situation. It also has a key and direct impact on the reported total of net profit.

The definition of the word market in the word LCM is the present replacement cost of buying the equivalent inventory items under a standard method. If there is a decline in replacement costs then there is a loss of worth in inventory. A loss is documented, if the recorded cost of inventory is higher than the replacement cost. No adjustments are made if the recorded cost is lower.

An inventory mistake can be the basis for misstatements in equity, net income, gross profit, and in cost of goods sold.

Capitalizing interest on building construction

“The criteria for determining whether an asset qualifies for interest capitalization are that the asset must not yet be ready for its intended purpose, and it must be undergoing activities necessary to get it ready. Qualified assets are defined as (1) assets that are constructed or otherwise produced for an enterprise’s own use, and (2) assets intended for sale or lease that are constructed or otherwise produced as...