Client Understanding.
Dear Client, It has come to my attention that you have some questions about the information I have asked for. It is my intention in this letter to explain why I have asked for the information in question. I will outline adjusting lower cost or market inventory on valuation, capitalizing interest on building construction, recording gain or loss on asset disposal, and adjusting good will for impairment.
Adjusting lower cost or market inventory on valuation When a company purchases additional inventory at a reduced price, the company has to adjust the price of their current inventory of an item to account for the probability of decreased profit. When there is a competitive company, they will also purchase the reduced items and pass the savings on to customers by selling the item for a lesser amount, lesser than normal sales prices. Competitive companies may sell the item they have on hand in inventory at reduced prices; this can cause a drop in profit, or a holding loss. The conservatism principle and the Accounting Research bulletin no.43 leads to the accounting valuation process known as lower of cost or market. The market in this case is†the market in which a company sells its merchandise and the market in which the company buys its merchandise†(accounting coach, part 1). Lower of cost or market is the lower of cost or replacement being no higher than net realizable value of the item, and no lower than net realizable value minus normal profit. Net realizable value is the highest point and net realizable value minus normal profit is the lowest point for replacement costs.
Client Understanding 3
There are four determining amounts used in figuring lower cost or market. (1) Actual cost, (2) the ceiling of replacement cost, (3) the replacement cost, (4) the floor of replacement cost. Generally Accepted Accounting Principles allow for “LCM to be applied in one of three ways†(accounting coach, part 4),
Adjusting lower cost or market inventory on valuation When a company purchases additional inventory at a reduced price, the company has to adjust the price of their current inventory of an item to account for the probability of decreased profit. When there is a competitive company, they will also purchase the reduced items and pass the savings on to customers by selling the item for a lesser amount, lesser than normal sales prices. Competitive companies may sell the item they have on hand in inventory at reduced prices; this can cause a drop in profit, or a holding loss. The conservatism principle and the Accounting Research bulletin no.43 leads to the accounting valuation process known as lower of cost or market. The market in this case is†the market in which a company sells its merchandise and the market in which the company buys its merchandise†(accounting coach, part 1). Lower of cost or market is the lower of cost or replacement being no higher than net realizable value of the item, and no lower than net realizable value minus normal profit. Net realizable value is the highest point and net realizable value minus normal profit is the lowest point for replacement costs.
Client Understanding 3
There are four determining amounts used in figuring lower cost or market. (1) Actual cost, (2) the ceiling of replacement cost, (3) the replacement cost, (4) the floor of replacement cost. Generally Accepted Accounting Principles allow for “LCM to be applied in one of three ways†(accounting coach, part 4),
References: Accounting coach.com, (2004-2010), Accounting Coach LLC, Adjusting Lower Cost or Market for inventory Valuation, Retrieved January 24, 2011 from http://www.accountingcoach.com/ Allbusiness.com , (1999-2011), All Business, Capitalizing Interest on Building Construction, retrieved January 24, 2011 from http://www.allbusiness.com/accounting/464117-1.html Reference for Business.com, (2011), Advameg Inc., Recording Gain or Loss on Asset Disposal , retrieved January 24, 2011 from http://www.referenceforbusiness.com/small/Bo-Co/Capital-Gain-Loss.html