Big Oil Company Memo
MEMORANDUM
TO: President Steve Corder, Big Oil Company
FROM: Accounting Research
DATE: August 19, 2013
SUBJECT: Client Understanding
CC: John Doe, Supervisor
This memo is issued to offer some understanding on the information requested for the analysis of work papers. The memo will define particular areas of review. The memo will also answer any questions you have concerning the analysis of the work papers regarding 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.
Adjusting Lower Cost of Market Inventory on Valuation
Generally Accepted Accounting Principles (GAAP) states inventory that …show more content…
However, a ceiling and a floor is applied to the cost of the inventory replacement (“Disclosure Net,” 2011). The ceiling is established to ensure that opportunity is removed for a company to overstate value of assets. The floor is also established to eliminate opportunity for unrealistic overstatement of profit by understating value of assets. This is why a review of work papers warrants an analysis of the lower of cost of market inventory on valuation and any …show more content…
Goodwill impairment shows that an acquired asset’s value fell below the initially cost that the company paid.
For example, your company acquired assets from the acquisition of Good Oil Company. The book value of Good Oil Company’s assets is $5 million, but your company paid $8 million for various reasons. Since your company paid $8 million for $5 million worth of assets, your company recorded $3 million of goodwill on your balance sheet.
Good Oil’s sales have fallen by 30% over the past six months since the acquisition because a competitor introduced an improved and less expensive oil product in the area. As a result, Good Oil’s fair market value fell to $3 million.
Now, a year has passed since the acquisition. This means that your company had to compare the fair value of Good Oil to the book value recorded on your financials and post goodwill impairment for the difference in value of what the asset would sell for today in comparison to the recorded
TO: President Steve Corder, Big Oil Company
FROM: Accounting Research
DATE: August 19, 2013
SUBJECT: Client Understanding
CC: John Doe, Supervisor
This memo is issued to offer some understanding on the information requested for the analysis of work papers. The memo will define particular areas of review. The memo will also answer any questions you have concerning the analysis of the work papers regarding 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.
Adjusting Lower Cost of Market Inventory on Valuation
Generally Accepted Accounting Principles (GAAP) states inventory that …show more content…
However, a ceiling and a floor is applied to the cost of the inventory replacement (“Disclosure Net,” 2011). The ceiling is established to ensure that opportunity is removed for a company to overstate value of assets. The floor is also established to eliminate opportunity for unrealistic overstatement of profit by understating value of assets. This is why a review of work papers warrants an analysis of the lower of cost of market inventory on valuation and any …show more content…
Goodwill impairment shows that an acquired asset’s value fell below the initially cost that the company paid.
For example, your company acquired assets from the acquisition of Good Oil Company. The book value of Good Oil Company’s assets is $5 million, but your company paid $8 million for various reasons. Since your company paid $8 million for $5 million worth of assets, your company recorded $3 million of goodwill on your balance sheet.
Good Oil’s sales have fallen by 30% over the past six months since the acquisition because a competitor introduced an improved and less expensive oil product in the area. As a result, Good Oil’s fair market value fell to $3 million.
Now, a year has passed since the acquisition. This means that your company had to compare the fair value of Good Oil to the book value recorded on your financials and post goodwill impairment for the difference in value of what the asset would sell for today in comparison to the recorded