...Client Understanding Paper ACC/541 April 10, 2012 Client Understanding Paper Dear Client, please find below the detailed written explanation on the topics you requested. The items addresses are as follows: 1. Adjusting lower cost or market inventory on valuation. 2. Capitalizing interest on building construction. 3. Recording gain or loss on asset disposal. 4. Adjusting goodwill for impairment. Adjusting lower cost or market inventory on valuation The term “inventory” applied to all the goods/materials that are acquired with the intention to resale to make profits, which includes: * “Are held for sale in ordinary course of business. * Are in process of production for such sales, or * Are to be currently consumed in the production of goods or services to be available for sale” (Schroeder, Clark, & Cathey, 2011, p. 264). Inventory physical count can be determined by using periodic or perpetual inventory system. The valuation of inventory is of significant importance for multiple reasons. First ending inventory constitutes major part in current assets and have substantial impact on working capital of the organization. Second, inventory value has direct impact on the net profits of the organization. There are several methods available in US Generally Accepted Accounting Principle (GAAP) for valuation of inventories, such as FIFO, LIFO, Average inventory and Lower of cost or market. Lower of cost or market (LCM) valuation method...
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...Client Understanding Kelly Ableman ACC/541 August 5, 2013 Jonathan Rubin As a newly hired Staff I, the responsibilities that are required are to analyze the work papers for one of the clients of the organization. This client is not clear about why the company is asking for information on the following topics: adjusting lower cost of market inventory on valuation; capitalizing interest on building construction; recording gain or loss on asset disposal; and adjust goodwill for impairment. This paper will strive to answer these questions for the client. Adjusting Lower Cost of Market Inventory on Valuation One of the requirements of the Generally Accepted Accounting Principles (GAAP) is that inventory be recorded at lower of cost or market rule, also known as LCM. In a company’s’ financial statements, assets are generally stated in the financial statements according to the cost principle. However, when it comes to inventory, cost principle is abandoned and lower of cost or market rule takes its place. The LCM states that inventory should be measured at the lower of cost or market value (Accounting Explained). What market value means basically is the replacement cost of the company’s inventory. This replacement cost can be in the form of a purchase cost or a manufacturing cost; simply stated, market value is the amount a company would have to pay to acquire their inventory of the same quantity and quality through purchase or through manufacturing. There are upper...
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...analyzing the papers provided, I realized that additional information is requested by your representatives. It was brought to my attention that ADT and its affiliates are unclear about why the additional information was requested on the adjusting lower cost of market inventory on valuation, the capitalizing interest on building construction, the recording of gains or losses on asset disposal, and the adjusting goodwill for impairment. The adjusting lower cost of market inventory on valuation is specified in Accounting Research Bulletin No. 43 (ARB No. 43). The Statement of Financial Accounting Standards (SFAS) No. 34 is the statement, which deals with capitalization of interest as part of the cost of the asset. The SFAS No. 144 addresses the reporting and accounting for the impairment of the disposal of long-lived assets. New rules for the accounting for goodwill have been addressed in SFAS No. 142. To be able to complete the analysis of the work papers of my clients’, certain information must be obtained. To alleviate the concern of the client of why the information is requested analysis of each topic and its importance will be discussed in this paper. The adjusting lower cost of market inventory valuation is essential because through the life cycle of inventories, the inventories will decline in value. Although the primary basis of accounting for inventories is cost, when inventories usefulness become lower than cost, then the use of adjusting lower cost of market is accepted. There...
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...PROJECT REPORT (Submitted for the Degree of B.com Honours in Accountancy and Finance under the University of Calcutta.) A Survey on Accounting & Reporting of Intangible Assets in some selected Indian companies Submitted by Name: MAITREYEE MUKHERJEE Registration no: 043-1221-0272-10 Roll no: Name of the college: Heramba Chandra College. Supervised by Name of the supervisor: JAYANTA GHOSH Name of the college: Heramba Chandra College. BACKGROUND: In 1494, a mathematically minded Veteran monk named Luca Pacioli published his “Summa de Arithmetica, Geometrica”, the first accounting textbook. It illustrated double-entry accounting, a system that makes the modern corporation manageable, even possible. Today, half a millennium later, Pacioli’s process, still pretty much intact, is being challenged like never before. Pacioli’s accounting system lets businesses keep track of changes in their assets. But this system deals primarily with tangible assets such as cash, inventory, investments, receivables, property, plant, and equipment. What go unrecorded are intangible assets such as quality of management, customer loyalty, information infrastructure, trade secrets, patents, goodwill, research, and...
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...Understanding Assets University of Phoenix Making sound business decisions and properly portraying a company to investors involves understanding working capital and assets. The lower of cost or market value can shape critical business decisions that need to be made. Understanding how to capitalize interest properly during a construction project can save money. When putting an asset to rest its important to portray accurately the loss or gain. When thinking about expanding by acquiring an existing business it is important to know how to adjust goodwill for impairment. Lower of Cost or Market Value A requirement of U.S. GAAP is that inventory is recorded at the lower of cost to produce it, repurchase it or the market value of the inventory (Investopedia, 2009). This principle affects the balance sheet and can affect the income statement. Here is an example of how this principle can play out. Assume it is December 2009 and retail store A has 20 basketballs in inventory. The basketballs were purchased from Spalding at a cost of $20 each and the plan is to sell them at a retail price of $70, a price that is in line with the competition. On December 31, Spalding announces a permanent price reduction – the basketballs can now be purchased for $5 instead of $20. Retail store A expects the competition to buy up the reduced basketballs and pass the savings on to customers, by advertising a price reduction. The competition plans to sell the basketballs for...
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...Advertising whereby the only connection the consumer has to the product is the advertising and the only way a consumer can act on the advertisement or commercial is to return a coupon or make a phone call. Direct-response advertising is geared to eliminate an intermediary in the purchase process. It can utilize a wide range of media, from matchbook covers to print or radio and television, although it is typically conducted through the mail. In direct-response advertising, the effectiveness of the advertising is directly related to the amount of sales. Thus people who specialize in it are very knowledgeable about the correlation between positioning an advertisement in a publication and the resulting audience responses. Thus it focused on direct response customer right from 1996 to reach a larger portion of Medicare eligible patients to market their products. This specifically was a pretty successful campaign, as the company increased its Medicare eligible diabetes customer base from 17,000 to 545,000 in 2003. To qualify as capitalized expenditure as assets, the direct responses expenses had to prove that the specific advertisements generated sales. Leads normally did not qualify. It has to be narrowly targeted and the response needs to be tracked. The company ran various advertising commercials on the television with each commercial being given a separate toll free number. For each customer, the firm kept a track of prescription, doctor and insurance carrier. All customer names...
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... As I was analyzing the papers provided, I realized that additional information was needed. It was brought to my attention that you are unclear about why the additional information was requested on the adjusting lower cost of market inventory on valuation, the capitalizing interest on building construction, the recording of gains or losses on asset disposal, and the adjusting goodwill for impairment. The adjusting lower cost of market inventory on valuation is specified in Accounting Research Bulletin No. 43 (ARB No. 43). Statement of Financial Accounting Standards (SFAS) No. 34 is the statement, which deals with capitalization of interest as part of the cost of the asset. SFAS No. 144 addresses the reporting and accounting for the impairment of the disposal of long-lived assets (Federal Accounting Standards Advisory Board, n.d.). New rules for the accounting for goodwill has been addressed in SFAS No. 142. I will be explaining each of these items in full detail. I will include the accounting principles and practices in hopes of improving your organization's practices and knowledge from this analysis. Adjusting lower cost of market inventory on valuation The lower-of-cost or market (LCM) is defined by “a basis whereby inventory is stated at the lower of either its cost or its market cost as determined by current replacement cost” (Kimmel, Weygandt, & Kieso, 2007, p. 280). The market is also both the market in which the merchandise was purchased by the company...
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...valuation, (2) capitalizing interest on building construction, (3) recording gain or loss on asset disposal, and (4) adjusting goodwill for impairment. To alleviate the concern of the client of why the information is requested analysis of each topic and its importance will be discussed in this paper. The adjusting lower cost of market inventory valuation is essential because through the life cycle of inventories the inventories will decline in value. Although the primary basis of accounting for inventories is cost when when inventories usefulness become lower than cost then the use of adjusting lower cost of market is accepted. There are many advocates that think that inventories should be valued at market price. The belief is assets should reflect current values. Generally Accepted Accounting Principles instructs that when inventories decline in value the future selling price should move in the same direction in the same time period. The American Institute of Certified Public Accountants provides the following definitions for use when applying the lower cost or market rule to inventories. These definitions are: 1. Market should not exceed the net realizable value. 2. Market should not be less than net realizable value reduced by an allowance for an approximately normal profit margin (Schroeder, Clark & Cathey, 2005, p. 256). Adjusting lower cost of market inventory valuation satisfies the qualitative characteristics of account information contained in SFAC No. 2. It...
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...TThe basic rules for interest capitalization are set forth in Statement of Financial Accounting Standards (SFAS) No. 34, Capitalization of Interest Cost. Under this statement, interest incurred throughout the construction period of a project should be included as part of the cost of the asset under construction rather than reported as an expense of the period. The construction period extends from the initial preconstruction activities (e.g., obtaining necessary permits) until an asset is ready to be placed into service. Capitalizing interest is not optional. Generally accepted accounting principles require the capitalization of interest given the proper circumstances. Addressing the three questions of 1) does the asset qualify, 2) what timing to use for capitalization, and 3) how much interest to capitalize, will help you evaluate the impact of capitalized interest on your financial statements. The construction of the new manufacturing plant as part of the expansion plans of the company warrant the circumstances which require the capitalization of interest costs. Generally accepted principles of accounting (GAAP) require the capitalization of interest costs if the asset qualifies. To qualify as an asset eligible for interest cost capitalization, the asset must be constructed or otherwise produced for an entity’s own use, including assets constructed or the amount capitalized is an allocation of the interest cost incurred during the period required to complete the...
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...Analysis of Working Papers of ABC Company Upword Accounting, LLC, in response to concerns regarding requests for information within the working papers, has prepared details to address questions pertaining to the following specific elements: • Adjusting lower cost of market inventory on valuation • Capitalizing interest on building construction • Recording gain or loss on asset disposal • Adjusting goodwill for impairment The details will incorporate the reason behind why the element was established, the impact on financial reporting, current and future implications on the element, we will review each of these elements individually. Adjust lower cost of market inventory on valuation Adjusting lower cost of market inventory on valuation is a requirement of Generally Accepted Accounting Principles in the United States that inventory be recorded a the lower of either the cost to produce it, the cost to repurchase it or the market value of the inventory (www.investopedia). The lower of cost and market method has two boundaries on the valuation of inventories. The first is the inventory ceiling, which requires that inventory must be reported no higher than the net realizable value less expenses. The second boundary is the inventory floor, which required that inventory value be reported at no lower than the net realizable value plus normally attainable profit. The rule of lower of cost or market is intended to provide a means...
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...Chapter 10 Operational Assets: Acquisition and Disposition Questions for Review of Key Topics Question 10-1 The term operational asset is used to describe the broad category of long-lived assets that are used in the production of goods and services. The difference between tangible and intangible assets is that intangible assets lack physical substance and they primarily refer to the ownership of rights. Question 10-2 The cost of an operational asset includes the purchase price (less any discounts received from the seller), transportation costs paid by the buyer to transport the asset to the location in which it will be used, expenditures for installation, testing, legal fees to establish title, and any other costs of bringing the asset to its condition and location for use. Question 10-3 The cost of a developed natural resource includes the acquisition costs for the use of land, the exploration and development costs incurred before production begins, and the restoration costs incurred during or at the end of extraction. Question 10-4 Purchased intangibles are valued at their original cost to include the purchase price and all other necessary costs to bring the asset to condition and location for use. Research and development costs incurred to internally develop an intangible asset are expensed in the period incurred. Filing and legal costs for both purchased and developed intangibles are capitalized. Question 10-5 ...
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...Financial accounting Course Assessment 1 FACC/mcyildv2/July14/1 Part A Balance sheet: Income statement: Workings Balance sheet: a/ Tangible fixed assets: 66000£ of fixtures and fittings bought as per August 1st, 2013, needed to be depreciated over 6 years on a straight line method, taking into account a residual value of 10%, meaning 6600 £. This means a yearly depreciation amount of 9900£, which can also be seen on line ‘p’ in the income statement. The 56100£ as the balance on the tangible fixed assets is the difference between the purchase value of 66000£ and the depreciation amount of 9900£. b/ WIP means Work in Process. These assets have been bought before July 31st, 2014, but according to the description have not yet started to be used in the business. Also this 10000£ was not yet reflected in the cash statement as was not yet paid, thus was added on line ‘j’, trade payables. As these assets are not yet used, these are also not being depreciated yet. Only form the moment they are being used, they will be included in depreciation. Therefore we have catalogued them here as WIP. c/ Inventory: the 32000£ is the difference between the 38000£ and the 50% of the 12000£ of inventory which will only be sellable for half of the price, meaning we need to show the lower of the value of the carrying amount and the market value, which in this case is the market value. The write off of this inventory is shown on line...
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...qualitative characteristics of accounting information contained in SFAC Number two and the definitions of assets and losses contained in SFAC Number six. This is, 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.” The problem with the LCM rule is that it only applies to downward inventory adjustments. Reporting losses and not gains on inventory valuation. The conservatism principle directs that organizations use the conservative approach to reporting inventory when using the LCM rule. “When the lower of cost or market is applied to inventory, the accountant will value the inventory items at the lower of (1) the cost, or (2) the replacement cost within a ceiling...
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...Chapter 12 Intangible Assets Lack physical substance (patents, copyrights, franchises, licenses, trademarks, trade names, goodwill) They are NOT financial instruments (A/R, notes and bonds receivable,….ect.) Valuation: Record at cost (everything necessary to make asset ready for intended use). For internally-generated intangibles, only direct costs are capitalized (e.g., legal costs for patent). If insignificant cost, then usually expensed. Amortization:* Limited-life intangibles—over useful life. Amortizable base equals cost minus residual value. Indefinite-life intangibles—do NOT amortize. * Usually decrease the value of the asset directly, can use a contra-account: Accum. Amort. “Types” of Intangible Assets Legal Amortization life Period Market-related: Trademark Indefinate, Company name renewable Not amortized Customer-related: Customer lists None Lesser of useful or economic life. Artistic-related: Copyrights Life of creator Lesser of useful or plus 70 years economic life. Contract-related: Franchises Length of Length of Licences contract or contract or Permits indefinite not amortized Technology-related: Patents 20 years Less of useful or legal life. Goodwill: None Not amortized Recording Goodwill Duncun Corp. purchased the Fran Company for $300,000 on December 31, 2003. The balance sheet of Fran Company...
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...industry—software capitalization and revenue recognition • Discuss various incentives that motivate managers to select one accounting method over another • Learn how to use accounting analysis method to better reflect economic reality Microsoft’s Financial Reporting Strategy Introduction • Phenomenal financial success over the past years Founded in 1975 by Bill Gates and Paul Allen Went public in 1986 at $25.75 per share. Revenue and operating income grew an average of 43% and 49% per year. Stable growth in stock price ( Exhibit 5 ) Report higher than expected financial performance Asset totaling $37 billion,book value of equity equal to $28 billion and market value about $460 billion on June 30,1999. Microsoft’s Financial Reporting Strategy Introduction • Conservative accounting policies GAAP allow managerial discretion in accounting policies In two key areas, Microsoft choose a rather conservative method of reporting (1) Software development costs (2) Revenue recognition Microsoft’s Financial Reporting Strategy Software development costs • FASB’s guideline (SFAS NO.86) Require capitalization once technological feasibility has been established. • Microsoft’s policy Expensed as incurred FASB’s guideline does not materially affect the company • Note From 1986 to 1999, annual outlays for R&D ranged from 11% to 17% of revenue.(Exhibit 2) Microsoft’s Financial Reporting Strategy Software revenue recognition • Guidance on the treatment AICPA statement of position 97-2: require...
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