In the course of normal business operations certain transactions require specific treatment in accordance with generally accepted accounting procedures (GAAP). To properly prepare financial statements, the analysis of working papers is imperative to insuring compliance. Clarification of why information is needed about adjusting lower cost of market inventory on valuation, capitalizing interest on building construction, recording gain or loss on asset disposal, and adjusting goodwill for impairment is presented here.
Adjusting Lower Cost of Market Inventory on Valuation
The valuation of inventory is essential because it significantly impacts working capital and the reported amount of net profits. Inventory valuation is a representation of the acquisition value of a cost expected to generate future revenues. The criteria used to determine the costs to be included in inventory depend on the amount of goods on hand, the most appropriate cost-flow assumption, and whether the market value declined since acquisition.
After the quantity of inventory is determined by either a physical count, perpetual records, or estimating procedures and the cost flow assumption is applied to inventory, the accountant may need to adjust the value of inventory at the lower of cost or market (LCM) if inventories have declined in value.
The LCM rule is used to report the value inventory because it is in line with the GAAP of conservatism, which prevents overstatement of assets. Using LCM prevents reporting inventory at an amount greater than the benefits it can provide. The AICPA specifies that market value should not exceed net realizable value and should not be less than net realizable value less an allowance for an approximately normal profit margin. These guidelines for valuing inventory help avoid misleading financial statement users...