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Accounting Essay

1809 words - 8 pages

We carefully examined and evaluated your financial statements in 2011 and identified several accounting policies and procedures inconsistent with U.S. GAAP. To better present the net income of your company, we provide the various recommendations for you to revalue your revenues and expenses in the following statements.
Inappropriate revenue recognition criteria and policies (should change revenue recognition method or change the allowance estimation, 2011 allowance amount should be larger than 2010 due to larger AR and the difficulty that the artist been through)
WAG records revenue from artwork sales when the Company and customer agree upon a selling price. This criterion does not conform ...view middle of the document...

The lower of cost or market should be used after a period of the purchase to determine whether there is an impairment on the inventory. Just as ASC 330-10-35-1 says, adjustment to lower of cost or market should be used for subsequent measurement of inventory cost.
* Improper application of average cost for art purchased in lots
The notes also mentions cost is determined using the specific identification method for individual pieces and using average cost for art purchased in lots. In our opinion, this costing method is problematic. Referring to U.S. GAAP, the major objective in selecting a method should be to choose the one which, under the circumstances, most clearly reflects periodic income. Exhibit 1 gives us the information that the 20 original oil paintings that WAG bought as a single lot on August 20, 2011 have a great difference in value. Two of them are more attractive and sold to an online buyer. But this buyer shows no interests in the remaining eighteen artworks. Based on the above information, we think WAG should not allocate the cost to each piece evenly in one lot. The internal value of them is obviously different. Their possibility to be sold and the probable profit to be earned are also quite different. Therefore, in order to better match the costs of artworks sold and the revenue from artwork, we highly suggest WAG allocate the inventory costs to each piece in a lot using a more logical approach. FIFO, LIFO and average cost are more suitable to be applied to large-quantity, standard and interchangeable products. But artworks are obviously unique and small in quantity. Thus, specific identification method is a better choice under WAG’s circumstance. By using this method, the management needs to have a fair estimates of the value on each artwork piece.
In conclusion, by using the average cost for art purchased in lots, WAG understates the cost of artworks sold on the two more attractive oil paintings. Therefore, the net income is overstated.
* Subjective determination of market value
Exhibit 3 states that market value is estimated by the Company’s management, taking into account the aesthetic of each piece. Even though Stephen has certain art knowledge, but this measurement is still subjective and unreliable. According to U.S. GAAP, the designated market value should be the middle value of three amounts: replacement cost, net realizable value, and net realizable value less a normal profit margin. Hence, we suggest WAG re-evaluate the market value of the artworks using the designated market value method.
* Ignorance of obsolescence of inventory
WAG has extensive but aging inventory, which are probably to be obsolescent. WAG should consider to write off the inventory by the amount of the difference between their cost and market value. Therefore, there will be an impairment loss on inventory. WAG’s net income is overstated by ignoring the obsolescence of inventory.
Improper expenses on 2011’s income statement
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