The accounting environment in the USA Essay Example | Topics and Well Written Essays - 1250 words

The bill environment in the USA - Essay ExampleThe amount of inventory in the w arehouse of a company can decrease in quantify as prices of goods can go down in price due to market fluctuations. A good example of this phenomenon can be visualized in agricultural crops. These crops vary in price on a daily priming coat as their prices are traded in the open market as commodities. In any type of labor the market of value of inventory can vary and as a consequence it can distort the current assets consider balance. Inventory is part of current assets. Accountants should always keep in mind the conservatism principle which states that when in doubt an accountant should choose the method that is less likely to overstate the assets or income of a company. The coating of lower of exist or market is aligned with the conservatism constraint. Valuing inventory at lower of cost or market implies writing down inventory when the value of inventory is lower than its costs. there is a cont ra account in the balance sheet called Allowance to Reduce Inventory to LCM that is used to light upon the necessary adjustment. This balance sheet account is used to report the amount that the inventorys market amount is on a lower floor the inventorys cost amount. The LCM method defines the market price of an item as the current reserve cost. An example of how to apply the method and its corresponding journal entry is illustrated below Inventory value = $myriad Current replacement cost = $9 cholecalciferol $10000 $9500 = $500 The $500 is considered a loss Journal entry Loss from Reducing Inventory to LCM $500 Allowance to Reduce Inventory to LCM $500 Capitalizing interest on building twist One of the characteristics of the construction industry is that projects take a coarse time to complete. Typically in business interest costs associated with financing any project are categorized as an expense. The Financial Accounting Standards Board (FASB) created a special rule for the construction industry that allows accountants to capitalize interest on construction project. FASB Statement No. 34 stipulates the guidelines that must(prenominal) be followed to wager capitalization of interest in construction projects. It also states the disclosure requirements for capitalized interest in the financial statements of a company. The interest on any loan may only be capitalized while the construction occurs. There are certain criteria that must be met in order to be able to capitalize construction interest. The three criteria are qualifying expenditures must already have been made activities to prepare assets for use must be in progress The firm must actually be paying interest (Young, 1994). At the moment that any of these three conditions seize to exist the company becomes ineligible to capitalize interest associated with construction projects. Any inventory used that is routinely manufactured or produced on a repetitive basis does not qualify for capitalization of interest if the inventory is purchased through debt (Young, 1994). Recording