August 13, 2012
It is our understanding that there are a few questions why further information is needed after the review of the data submitted. As part of our mission statement we ensure that all our clients’ financial data follows appropriate guidelines to ensure wellness of your company as well as investors.
The first issue to be addressed is the decision to switch to lower of cost or market value method (LCM). It is understood that this method will benefit your company as well as investors because it provides users “with more conservative balance sheet and income statement valuations,” while also preventing misleading information to users (Schroeder, Clark, & Cathey, 2011), but because this method allows inventory to be valued at one cost one year, and market the next year it can cause inconsistency in financial reporting. Also in reporting with this method, will your organization be using an item-by-item basis, category basis, or a total inventory basis? This information is important because with an item-by item basis, it is considered the most conservative and results in the “largest reduction of inventory from cost and the largest loss on the income statement,” whereas a total inventory basis is the lease conservative and results in the “smallest reduction of inventory cost and the smallest loss on the income statement,” and using a category basis falls in the middle of an item-by-item basis and total inventory basis ("Accountingcoach", 2012).
The second issue that brought up some concern was capitalizing interest on building construction. It is understood that extra financing is needed to purchase materials during construction, and will most likely have come from a third party investor, but it is unclear why the interest on this borrowed amount is recognized as an asset instead of an expense. According to Financial accounting theory and analysis: Text readings and cases,...
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