Client Understanding Paper

1665 WordsAug 9, 20107 Pages
Client Understanding Paper Accounting Issue: When and why to adjust inventory values to lower of cost or market? Sources: 330-10-35-1 35-1 A departure from the cost basis of pricing the inventory is required when the utility of the goods is no longer as great as their cost. Where there is evidence that the utility of goods, in their disposal in the ordinary course of business, will be less than cost, whether due to physical deterioration, obsolescence, changes in price levels, or other causes, the difference shall be recognized as a loss of the current period. This is generally accomplished by stating such goods at a lower level commonly designated as market. 330-10-35-2 35-2 The cost basis of recording inventory ordinarily…show more content…
835-20-10-2 10-2 On the premise that the historical cost of acquiring an asset should include all costs necessarily incurred to bring it to the condition and location necessary for its intended use, in principle, the cost incurred in financing expenditures for an asset during a required construction or development period is itself a part of the asset 's historical acquisition cost. The cause-and-effect relationship between acquiring an asset and the incurrence of interest cost makes interest cost analogous to a direct cost that is readily and objectively assignable to the acquired asset. Failure to capitalize the interest cost associated with the acquisition of qualifying assets improperly reduces reported earnings during the period of acquisition and increases reported earnings in later periods. Apply to Guidance: When financing the construction of a building, the interest should be capitalized as part of the cost of the building. This would more adequately match revenues and expenses in the period in which they are earned. When the building is being used and the cost thereof is being allocated via depreciation, the expenses would adequately reflect the cost of the building and include a portion of the interest that was incurred as the building was being constructed. If the interest is not
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