As a newly hired Staff I, you are responsible for analyzing the work papers for one of the clients of your organization. Your client is not clear about why you are asking for information on the following topics:
o Adjusting lower of cost or market inventory on valuation
o Capitalizing interest on building construction
o Recording gain or loss on asset disposal
o Adjusting goodwill for impairment
Write a 1,050 to 1,400 -word response that addresses your clientýs request. Please keep in mind the client has already made the transactions related to the above issues.You should assume they have some accounting knowledge on each issue.It is not necessary to give the client a theory lesson, but you can briefly include information related to accounting standards or other authority.You are there as part of the audit.Your tone should be familiar because this is not a new client.You are the new person. Please do not mention you are a new to the firm. Explain your purpose for asking for the information on each issue. You do not need to detail your audit process, but you should let the client know some of what you will be doing with their information and why.
Format your paper according to APA guidelines, including appropriate in-text citations and references. No Foot or end notes please
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Adjusting lower cost or market inventory on valuation
Title: Explanation of Accounting Procedures for Adjusting Lower of Cost or Market Inventory on Valuation, Capitalizing Interest on Building Construction, Recording Gain or Loss on Asset Disposal, and Adjusting Goodwill for Impairment
Introduction:
Dear Client,
As a newly hired Staff I at our organization, I have been tasked with analyzing the work papers for your business. I understand that you may have concerns regarding why I am requesting information on certain topics. Rest assured, my aim is to ensure compliance with accounting standards and to gain a thorough understanding of your financial statements. In this response, I will explain the purpose behind each topic and provide a brief overview of the relevant accounting principles or standards involved.
1. Adjusting Lower of Cost or Market Inventory on Valuation:
Inventory valuation is an important aspect of financial reporting, as it directly impacts the calculation of cost of goods sold and net income. The lower of cost or market (LCM) rule requires companies to value their inventory at the lower of its cost or its market price. By examining the LCM adjustment, I can ensure that your inventory is properly valued and reported in accordance with generally accepted accounting principles (GAAP).
2. Capitalizing Interest on Building Construction:
When a company constructs a building, it incurs interest expenses during the construction period. Generally, interest costs on qualifying building projects can be capitalized as part of the overall cost of the asset. By capitalizing interest, the cost is spread over the useful life of the building, rather than expensing it immediately. This treatment aligns with the matching principle, which aims to match expenses with the revenues they help generate. I am requesting information on this topic to assess whether your company has properly capitalized the interest expenses related to building construction.
3. Recording Gain or Loss on Asset Disposal:
Asset disposals occur when a company sells or disposes of a long-term asset, such as equipment or property. Recording gains or losses on asset disposals is necessary to accurately reflect the financial impact of selling or disposing of an asset. A gain or loss is recognized by comparing the proceeds from the sale to the asset's carrying value. This adjustment ensures that the financial statements accurately reflect the economic consequences of asset disposal and adheres to the principle of faithful representation. Hence, I am seeking information to evaluate whether your company has appropriately recorded gains or losses on asset disposals.
4. Adjusting Goodwill for Impairment:
Goodwill is an intangible asset that arises when a company acquires another business for more than the fair value of its net assets. Goodwill is tested for impairment annually or whenever events or changes in circumstances indicate a potential impairment. Impairment occurs when the carrying amount of goodwill exceeds its recoverable amount. By examining the assessment of goodwill impairment, I can ensure that your business has valued goodwill correctly and followed the relevant accounting standards (such as IFRS or GAAP).
Conclusion:
In conclusion, as part of the audit process, I need to review these specific areas to ensure compliance with accounting standards, provide reasonable assurance, and present a fair view of your financial statements. It is important to understand that my aim is not to question your accounting knowledge but to evaluate the appropriateness of the transactions undertaken by your business.
Should you have any further questions or require additional clarification, please do not hesitate to reach out. I am here to assist you in achieving accurate financial reporting and maintaining the highest level of professionalism.
Sincerely,
[Your Name]