Client Understanding Mike Stanley
Accounting 541
December 04, 2014
Kenneth Burton
Client Understanding A company must post and adjust financial statements according to rules and regulations of the Financial Accounting Standards Board (FASB). Accountants routinely advise clients regarding purchases and asset management. Business managers are wise to seek council regarding common accounting concepts affecting modern commerce. The preceding document will provide a potential client with fundamental accounting concepts for legal business practices
Adjusting Lower Cost of Market Inventory on Valuation Two types of cost exist when valuing a company’s inventory. The first is the original price cost. A business pays the initial fee when obtaining merchandise. The second category is the market price. Current prices dictate market prices, regardless of the merchandise’s time in inventory. The market price is also the merchandise’s replacement cost. When an organization’s accounting staff values the inventory, the lowest cost is the amount management must apply (Schroeder, Clark, & Cathey, 2011). Any market value can reach an amount greater than the product’s Net Realizable Value (NRV) or below. Accountants calculate the NRV through subtracting selling costs and completion costs from the possible selling cost. Many analysts prefer to value merchandise at the market value since a current asset is likely to mirror current values. The market value approach to inventories must possess a rule for when prices drop in value (Wampler & Holt, 2013). Generally Accepted Accounting Principles (GAAP) deals with such a scenario with mirroring future sale prices accordingly. If an accountant predicts any price depreciation in the future, he or she will document such losses during the same period of the decline (Wampler & Holt, 2013). Businesses are wise to apply the LCM method to report merchandise at the most current, relevant values.
Capitalizing Interest on Building Construction Constructing a building is a risky venture for any company. Several variables can contribute to a disaster; furthermore, the merchandise built in the new building can prove unprofitable. Accountants can select between two methods for capitalizing interest on constructing a new building. The first method does not allocate fixed overhead. Fixed costs are expenses that remain constant throughout the product cycle’s lifespan. Activity within the organization can fluctuate sporadically; however, the fixed costs do not change. Some examples of fixed costs are insurance expenses and employee salaries (Schroeder et al., 2011) An opposing viewpoint regarding fixed overhead is attempting to allocate a particular amount. Such a strategy is a difficult task and selecting a pre-determined amount to allocate is nearly impossible. If the new facility does not produce desirable quantities, management will attach the overhead costs to the production item or other products the company offers. Companies strive to provide products at competitive prices, and any factor that increases an amount can harm sales (Accounting Tools, 2014). The second approach to capitalizing interest on a new building is to allocate overhead in increments. Such an approach figures the extra costs associated with the new construction project. The incremental costing approach does not factor items such as, depreciation and employee salaries. These expenses occur even if the development project does not occur. The incremental approach considers costs directly related to the new addition (Accounting Tools, 2014). Recording Gain or Loss on Asset Disposal Assets and machinery often become obsolete and unusable. The longer a machine is manufacturing products, the more the machine accumulates depreciation. A point in time can occur when the device reaches the full point of depreciation. Accountants take certain
