Client Understand Paper
Accounting Theory and Research/ ACC 541
November 21, 2011
To provide your organization accurate financial data, reports and statements, we follow rules developed according to Generally Accepted Accounting Principles (GAAP). Based on GAAP, it is important that we follow certain rules and have accurate client information. You have asked why we are asking for certain information related to certain topics within your organization. An explanation as to why we are asking for this information and related examples is provided in this paper to help assist you in your understanding of what we are doing.
Adjusting lower cost or market on inventory valuation
Valuing ...view middle of the document...
This is done in order for a company to minimize its tax liability. How this works is if you have a product you purchased for $100. If today’s value of the product is still $100 you would record the inventory valuation at $100. But if the replacement cost or market value of this item drops to $80, the $80 would now be the inventory valuation amount, based on LCM. LCM follows the “ conservatism principle and a specific accounting pronouncement, Accounting Research Bulletin No. 43 (ARB No. 43) leads to an accounting valuation method known as the lower of cost or market, or LCM” (AccountingCoach.com).
Capitalizing interest on building construction
There will be times when you will need to purchase a building or have a building constructed for you. Due to the considerable period of time between start to the finish of the project, there are special considerations taken regarding the costs of the building project. One of the special circumstances involves the capitalizing of interest on the building project. Generally, interest costs related to the construction are included in the cost of the building. This is called capitalizing the interest costs. To capitalize the interest costs, FASB Statement No. 34, “specifies that three conditions are necessary for capitalization of interest costs: qualifying expenditures must already have been made; the activities that will prepare the assets for use must already be in progress; and the company must actually be paying interest. If the project does not meet the criteria, then the interest would be recorded as interest expense” (FASB.org). According to Schroeder, Clark, & Cathey (2011), it is stated in FASB ASC 835-20-30, that the amount of interest to be capitalized is the amount that could have been avoided if the asset had not been constructed.
Here are two examples of this concept. The first is if it cost you $500,000 to build a building and the capitalized interest was $20,000, then the cost of the building would be $520,000. If this building was already built, we would only capitalize the difference of the $20,000 paid to build a new building and the $10,000 needed to get this building ready for use. The cost would be depreciated over the life of the building and the remaining interest would be reported as an interest expense.
Recording gain or loss on asset disposal
Assets are sold or disposed of all the time. When assets are sold, it is important to account for any gain or loss. “If a company disposes of (sells) a long-term asset for an amount different from its recorded amount in the company's accounting records (its book value), an adjustment must be made to net income on the cash flow statement” (AccountingCoach.com).
For example, let's say you sell one of your printing presses for $45,000. That printing press is shown on the company records at its original cost of $500,000 less accumulated depreciation of $475,000. The book value of the printing press is $25,000. ...