Client Understanding

Client understanding
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While perusing financial information and statements, I have come across issues that need more clarification including adjusting lower cost of market inventory on valuation, capitalizing interest on building construction, recording gain or loss on asset disposal an adjusting goodwill for impairment. The issues to be handled are spelt out by the Financial Accounting Standards (FASB), and the organization should follow the generally accepted accounting standards when preparing financial statements.
Adjusting lower cost of market inventory on valuation
Even though, organizations may have diverse inventory evaluation methods, they should be applied according to GAAP consistently in each financial year. GAAP requires that an entity should record inventory at the lower cost or market rule whichever is lower, meaning that organization should compare the original cost and the market price (Bragg, 2008). This provision is important to show a realistic and objective inventory valuation, because changes like inventory deterioration, obsolescence and fall in the market value affect the inventory valuation. When the market value is lower than the inventory cost, then the organization should recognize the loss, and charge to the cost of goods sold, if the adjustment is minor. If it is a material adjustment, it is necessary to track changes through a separate account.
In preparing financial statements, it is important to minimize bias as much as possible, but conservatism also dictates that there is a need to avoid overstating assets and incomes, while liabilities are typically reported at higher values (Bragg, 2008). Employing the lower of cost or market value is essential in the face of uncertainties. The business may hold inventory when it is not clear when the stock will move out, and this adheres to the conservatism principle when dealing with inventories and securities. Hence, adjusting lower cost of market inventory on valuation is consistent with GAAP and definition of assetscapitalizing interest on building construction
FAS No. 34 sets the parameters for recognition of capitalizing interest in acquisition of specific assets (FASB, 2008). Building construction takes time, and the statement states that for there to be interest capitalization, assets require time to be ready to be used for there original use. Assets such as facilities build to be used by the organizations, those intended for sale or lease qualify for interest capitalization. Even though, interest is typically an expense, there is a need to separate different assets, some whereby interest is capitalized and affects the value of such assets. This is especially the interest cost on obligations and borrowings and how this affects the amount capitalized during the time when the asset is completed. The applicable capitalization interest rate will depend on the organization’s outstanding borrowings, showing that it is important to note which assets need to account for interest cost as part of acquisition cost.
The organization should ideally understand capitalization of interest when dealing with building construction. The company should maximize on opportunities in capitalizing interest, and hence there is a need to classify assets depending on whether there is capitalization of interest. Also related to the capitalization is that it is necessary to budget correctly for the construction, since money borrowed should be adequate to cover the building construction. Additionally, this will enable the organization to evaluate whether it is worthwhile to undertake projects and handle the interest involved. The capitalizing interest added to the value of the asset cost affects the balance sheet balance, and since it affects depreciation and the income ...