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Client Understanding

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Submitted By colleenwitten
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Client Understanding Paper
Colleen Witten
ACC/541
11/11/2013
Thomas Gruber

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 are all areas in which numbers on a financial statement can be distorted. There are rules and regulations regarding each one that a company should follow and auditing of these areas is necessary for financial statement compliance. Any organization must recognize that the GAAP is an ever evolving set of regulations and standards that should be followed.
Using the lower cost of market is defined as comparing the market value of each fixed asset with its cost and then using the lower of the two as an inventory value. (FASB ASC 30-10) Cost is defined as how much a company pays for an item if it purchases the item or how much it cost the company to manufacture the item. The market (How to Use Lower Cost of Market, 2012) value of an item is usually its replacement cost; unfortunately replacement cost is not always an accurate number to use. The net realizable value is the expected selling price of an item minus any selling cost or costs to complete the item, which will inflate the replacement cost. Replacement Cost can also be lower than it should be when the net realizable value minus the normal profit is placed on an item.
The GAAP requires that all inventory that is in reserve being stated and value at either the cost or the market value method. (Lower Cost of Market Method) Sometimes an adjustment must be made to the balance sheet when the cost of the inventory is higher than the market value. When a company’s inventory is under the lower of cost or market value the contra asset inventory account is used. This is a balance sheet account used to report the amount that the inventories reported is below

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