Financial Reporting

ABSTRACT

The research paper is based on the updated Principle followed under GAAP. The research paper highlights major important areas of the accounting reporting and determines the way to record assets in financial statements.

Table of Contents

Introduction4

Lower of Cost & Market valuation method for Inventory4

Analysis of the Method4

Gross Profit Margin5

Retail Inventory Method5

LIFO RETAIL METHOD6

Changes in inventory valuation6

Identify disclosure requirements using GAAP7

Cost related to acquisition of fixed assets7

Self constructed assets8

Lump sum purchase8

Fixed asset turnover ratio8

References11

Financial Reporting

Introduction

Lower of Cost & Market valuation method for Inventory

In order to report the value of inventory, the accounting principles suggest using GAAP (Generally Accepted Accounting Principles). GAAP requires reporting of every dollar value of inventory in the statement of affairs. To maintain the annual records it is necessary for the company to report the dollar value of inventory. The inclusion of dollar value reflects the ability to generate revenues for the item and is termed as the net realized value of the asset. If the inventory count includes those items which became obsolete and didn't have the ability in to liquid cash. The amount of these items should also be recorded with all the other items because it is in the possession of the company. It is a mandatory regulation by GAAP that, inventory should be reported in the statements by using the Lower of cost or market value method. The reason behind using this method is that it also includes the reporting of obsolete inventory items.

Analysis of the Method

The method is widely used and accounts regard this method to be a logical one. The method consists of the calculation of the replacement cost (NRV). On the other hand, the method contains two types of inventory

The upper limit i.e. (Ceiling) represents as NRV

The lower limit i.e. (Floor) represents (NRV - NP)

These limits define the market and the replacement costs lie in between these two extreme ends. Once the accurate value is determined it became the part of balance sheet and in response a journal entry is passed in general journal.

Gross Profit Margin

At some point in time companies examined difficulties in counting the inventory. The example of usage of this method can be witnessed when the records of some companies were washed by Flood in New Orleans as well as, records of some of the company have got totally ruined. The question arises that how will be the loss of inventory recoded when there is no record found? Because the company needs to claim that certain amount from the insurance company. If they don't have the records or any authentic source they will not be able to entitle the Insurance coverage. The answer to this question is reflected in the Gross Profit Method.

It is a technique through which ending inventory is calculated. It is a method which is used to calculate the ending inventory of every month. It is recognized by accountants as the method which calculates an approximate amount of inventory close to the original amount.

GAAP prohibits the use of Gross profit ...