Client Understanding
- Submitted by: jlshaffer
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- Category: Other
- Date Submitted: 08/20/2014 07:31 PM
- Pages: 5
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Client Understanding Paper
LRS Accounting Firm takes pride in client satisfaction. As your accountant, I believe it is important for you to comprehend the fundamentals of what to expect through the review of your company’s finances. I am here to help you better understand the accounting terms and why we require certain information. I will discuss these terms in detail to clear up any misunderstanding that you may have.
Lower of Cost or Market Rule
In reviewing your questions and concerns, I will start by giving you basic explanations. First the term LCM stands for the lower of cost or market rule. The LCM is essentially the original cost of an item or what you paid for the item and what the net value would be today to replace the item. We assume that your entire inventory is not going to sell at the current market price by the end of the year so this would benefit your company if the cost were lowered now. Applying this rule to your current inventory would provide an expense to the current year, which would result in a smaller profit; this would lower your taxes. This will help to accurately report losses on your balance sheet and income statement. “To determine the LCM, we must find the net realizable value” (Harrison & Horngren, 2008). This value is the selling price of the inventory minus normal profit. The NRV has a ceiling value and a floor value. If the current replacement value is higher than the ceiling value, the ceiling amount is equal to market value. Once the NRV is found, true LCM can be determined.
Capitalizing Interest on Building Construction
When you consider whether or not to construct a building, it is important to discuss some of the costs of doing so. Most companies do not have the capital to construct a building. Based on your companies financial situation, more than likely you would be taking out a loan. The payments on a loan typically have interest. This interest can be capitalized up to the amount, which is borrowed to construct...
LRS Accounting Firm takes pride in client satisfaction. As your accountant, I believe it is important for you to comprehend the fundamentals of what to expect through the review of your company’s finances. I am here to help you better understand the accounting terms and why we require certain information. I will discuss these terms in detail to clear up any misunderstanding that you may have.
Lower of Cost or Market Rule
In reviewing your questions and concerns, I will start by giving you basic explanations. First the term LCM stands for the lower of cost or market rule. The LCM is essentially the original cost of an item or what you paid for the item and what the net value would be today to replace the item. We assume that your entire inventory is not going to sell at the current market price by the end of the year so this would benefit your company if the cost were lowered now. Applying this rule to your current inventory would provide an expense to the current year, which would result in a smaller profit; this would lower your taxes. This will help to accurately report losses on your balance sheet and income statement. “To determine the LCM, we must find the net realizable value” (Harrison & Horngren, 2008). This value is the selling price of the inventory minus normal profit. The NRV has a ceiling value and a floor value. If the current replacement value is higher than the ceiling value, the ceiling amount is equal to market value. Once the NRV is found, true LCM can be determined.
Capitalizing Interest on Building Construction
When you consider whether or not to construct a building, it is important to discuss some of the costs of doing so. Most companies do not have the capital to construct a building. Based on your companies financial situation, more than likely you would be taking out a loan. The payments on a loan typically have interest. This interest can be capitalized up to the amount, which is borrowed to construct...