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

The accounting environment in the USA - Essay Example The amount of inventory in the warehouse of a company can decrease in value 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 basis as their prices are traded in the open market as commodities. In any type of industry the market of value of inventory can vary and as a consequence it can distort the current assets account 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 application of lower of cost 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 contra account in the balance sheet called Allowance to Reduce Inventory to LCM that is used to make the necessary adjustment. â€Å"This balance sheet account is used to report the amount that the inventory's market amount is below the inventory's cost amount†. The LCM method defines the market price of an item as the current replacement cost. An example of how to apply the method and its corresponding journal entry is illustrated below: Inventory value = $10000 Current replacement cost = $9500 $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 construction One of the characteristics of the construction industry is that projects take a long time to complete. Typically in business interest costs associ ated 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 be followed to calculate 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 constructi on 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

RISK MANAGMENT FOR DIFFERENT CASES Case Study Example | Topics and Well Written Essays - 1000 words

RISK MANAGMENT FOR DIFFERENT CASES - Case Study Example Discussion Distinctive feature with Dubai’s palm islands is that unlike the development and construction of such other islands in the world where metal as well as concrete are applied, this island’s construction wholly adopts natural materials (Butler, 2005). This therefore represented the main challenge while designing the artificial island and collaborative efforts by ‘’construction contractors and engineering scientists’ were involved for the exercise. Major risk was however the way to sustain the sand island after reclamation taking into consideration the exposure to tides as well as waves and rising sea level as influenced by global warming (â€Å"Palm Islands, Dubai - Compression of the Soil† 2013). Nevertheless, the construction of a crescent water-break structure has the capacity of protecting the island from the adverse effects of such waves and tidal rises. Precaution is however taken by the scientists who constructed the breakwater crescent because the destruction of the crescent has a direct implication of destruction of the island. This therefore presents the main challenge. Among other lessons learnt from this construction is that the islands are artificial and made of natural materials without such materials as concrete and metal. Besides, the island’s construction suffered time constraint and was scheduled to last only three years, a challenge that the contractors were to succeed in. the construction of the crescent faced a major challenge of poor water circulation which they sought to address through two openings through which tidal water would replenish the fronds water supply and control stagnation. Another challenge is that the sand used is loose and uncompacted which presents the main threat to the welfare of the island. Liquefaction is therefore seen to have a high potential of occurring in the event that an earthquake occurs, which would have adverse outcomes to the islands (‘MESSINA p roject’, 2005). The precautions in this construction process were inevitable as the design was intended to support over a million people upon completion (‘Island life’, nd). Erosion along the beach posed another major problem with the palm island where unlike with natural beaches, the artificial beach would fail to replenish sand washed always by water, as would be a natural course with the natural beaches (Choomchaiyo, 2009). The analysis of this project presents some basic risks, which pose a threat to the successful completion of the project as designed. Financial resources were paramount with the project requiring continued adjustment longitudinal researches. The controversy around the matching of the financial as well as resultant social benefits from the project and the costs incurred poses a major challenge to determine. Besides, misrepresentations and miscalculations while planning for the project has adverse effects in costs incurred by the public over t he project. Other risks associated with the project are costs risks (such as maintenance, construction as well as operation of the island), demand risks (forecasting revenue returns to be earned), future financial market performance as well as political risks. Moreover, such a mega project has the capacity of fragmenting social as well as physical coherence in the island (Darmaki, 2008). The palm project