Client Understanding Paper

Client Understanding Paper

Client Understanding

First, I am pleased to have you and your company, Legendary Organic T-Shirts, Inc. (LOTS), as one of our clients.   I also would like to thank you for giving me the opportunity to work with you about your records.   I have analyzed your work papers and have a few questions.   I am mostly concerned about the following topics:
• Adjusting lower cost of market inventory on valuation
• Capitalizing interest on building construction
• Recording gain or loss on asset disposal
• Adjusting goodwill for impairment
I know you have some concern about why I need to review the aforementioned topics with you.   I want to reassure you that my questions are meant to benefit LOTS so that you can continue to be profitable and expand operations.   After I explain all of the topics you will have a clearer understanding of why these topics are important to us all.
Inventory Valuation
Since inventory comprises the majority of a business’s assets and has the most detrimental influence on a company’s profits, it is important to assess their value properly.   Unlike other business assets that represent an expectation of funds to be received, inventory represents the acquisition cost of something that generates future income.   To get a true value of the your company’s t-shirt inventory we must total the amount of materials we have on hand, select the appropriate cost-flow assumption, and determine the current market valuation for the product.   Generally Accepted Accounting Principles (GAAP) guidelines state that inventory valuation should follow the lower of cost or market (LCM) basis (Schroeder, Clark & Cathey, 2011).   This means our products are worth whatever it costs to replace, or how much the market will pay for it, whichever is less.   The lower amount is used because inventory typically decreases in value over time.   For this reason some companies choose the last-in-first-out (LIFO) inventory valuation method during inflation instead of the...