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Client Understanding

  • Date Submitted: 01/08/2013 05:17 PM
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Client Understanding
      This paper will provide an explanation regarding the following items addressed as client questions: adjusting lower cost of market inventory on valuation, capitalizing interest on building construction, recording gain or loss on asset disposal, and adjusting goodwill for impairment.
LCM Inventory Valuation
      Inventory valuation is extremely important for successful operations of a business for two major reasons.   First, current assets are primarily made up of inventories that cause a substantial impact to working capital and the current financial position of the business.   Second, the method used for valuation of inventories has a large and immediate effect on the net profit of a business.   Valuation procedures for inventory are different from cash, cash equivalents, temporary investments, and receivables. The aforementioned items consist of amounts or values that are easier to estimate as funds expected to be received from them. Conversely, inventory values disclosed on financial statements do not guarantee the expected amount of cash to be received in the future but the acquisition value of a cost expected to generate future revenues. Therefore, it is critical for a business to value inventory properly.   Proper valuation considers the goods on hand, most reasonable cost flow assumption, and decline in market value of inventory after the inventory acquisition (Shroeder, Clark & Cathey, 2005, p. 253). Typically, accountants prefer the valuation of inventory at market value because it associates current assets to reflect current values.   The qualitative characteristics of accounting noted in SFAC No.2 and the definitions of assets and losses contained in SFAC No.6 supports the use of the lower cost or market rule for inventories.   Interpretation reveals that “when the cost of inventory exceeds its expected benefit, a reduction of the inventory to its market value is a better measure of its expected future benefit” (Shroeder, Clark &...

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