Client Understanding Paper
Nicole D Flynn
Acct/541 Accounting Theory & Research
29 July 2013
Chief Executive Officer
From: Nicole Flynn
Subject: Clarification Letter
Dear Mr. Smith:
One of the key pillars in which our organization is based is on customer satisfaction as well as understanding in the matters related to the services we offer our clients. It has therefore come to my attention that in our past correspondence, we may have asked for great amount of information whose immediate significance and relevance may not be so clear to most of our clients. The particular information ...view middle of the document...
It is therefore very necessary to have knowledge of the items stated above which were in your factories as of the stipulated date (Schroeder, Clark, & Cathey, 2005).
Counting inventory is quite easy as this can be done manually at the end of the stated period, through estimation or yearly perpetual counting. Such information is valuable when auditing to enable comparison of costs and revenues. It is important also know the condition of the inventory as spoilage, absolution or reduction in price during storage will be an added cost on the production of goods during this period (www.acountingformanagement.com).
It is worth to note that auditors have a misconceived notion that current inventory ought to show their present market value. They will therefore use the lower for cost and /or market value as basis of inventory determination. The conservatism benefits, however proves this to be a misinformed way of looking at accounts (Schroeder, Clark, & Cathey, 2005).
2. Capitalizing interest on building construction
This issue pertains to any building that your company owns that may be under construction or is already constructed but has to be taken into account in matters that may relate to interest. The idea here is to gain the most out of interest based on structural construction undertaken by the company. It is essential for us to determine whether your company has made necessary budget allowance for any construction undertaking as interest will be charged on the loan products offered. This kind of interest is called capitalizing interest and it is calculated by adding envisioned long-term project that is self financed which the company may wish to acquire in the future (accountingcoach.com).
The cost of the project is then added to any pronounced interest before the flagship of the project. Having taken this to account, the capitalizing interest will then be included in the cost of the actual asset, in this case being a construction. It will appear in the balance sheet as part of the cost of the asset and not as a separate entity. This in turn is included in the depreciation value of the asset and is stated as such in future company statement (accountingcoach.com).
It is worth noting that capitalization period will begin immediately the costing of the intended project has been completed. It is also important to know the kind of projects that should be put under this category. The Internal Revenue Authority qualifies the following to fall under the capitalized interest category:
• Every real estate registered under the company name.
• Personal property that are tangible in nature and have a class life exceeding 20 years.
• Personal property with a production period exceeding two years.
• Tangible property , which may be personal and has a production period that exceeds one year and a production cost that exceeds $1 million.
However, there is no interest capitalization in the following assets: