Company X has not historically had a valuation allowance and has historically been very profitable. The Company is getting ready to prepare its year-end financial statement for December 31, 2021 and is thinking ahead about technical accounting issues they might encounter as they prepare their financial statements. The last two years have been rough, as COVID hit the company's bottom line in 2020 and early 2021. In the second half of 2021, inflation began to eat into the Company's bottom line as they were unable to raise prices to offset the increase in costs from their suppliers. In both 2020 and 2021 the Company will have a loss and these losses outweigh the 2019 income year, putting the company in a small three year cumulative loss position. Management thinks they may need to record a valuation allowance, but is looking for some guidance. They have hired you to assist them with this analysis. They have specifically asked for your guidance on what factors they should evaluate when determining whether to record a valuation allowance. Provide a list of factors and then provide a list of questions you might ask the Company to begin putting together a memo to reach a conclusion about whether a valuation allowance is required.
Company X has not historically had a valuation allowance and has historically been very profitable. The Company is getting ready to prepare its year-end financial statement for December 31, 2021 and is thinking ahead about technical accounting issues they might encounter as they prepare their financial statements. The last two years have been rough, as COVID hit the company's bottom line in 2020 and early 2021. In the second half of 2021, inflation began to eat into the Company's bottom line as they were unable to raise prices to offset the increase in costs from their suppliers. In both 2020 and 2021 the Company will have a loss and these losses outweigh the 2019 income year, putting the company in a small three year cumulative loss position. Management thinks they may need to record a valuation allowance, but is looking for some guidance. They have hired you to assist them with this analysis. They have specifically asked for your guidance on what factors they should evaluate when determining whether to record a valuation allowance. Provide a list of factors and then provide a list of questions you might ask the Company to begin putting together a memo to reach a conclusion about whether a valuation allowance is required.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Company X has not historically had a valuation allowance and has historically been very profitable. The Company is getting ready to
prepare its year-end financial statement for December 31, 2021 and is thinking ahead about technical accounting issues they might
encounter as they prepare their financial statements. The last two years have been rough, as COVID hit the company's bottom line
in 2020 and early 2021. In the second half of 2021, inflation began to eat into the Company's bottom line as they were unable to
raise prices to offset the increase in costs from their suppliers. In both 2020 and 2021 the Company will have a loss and these
losses outweigh the 2019 income year, putting the company in a small three year cumulative loss position. Management thinks
they may need to record a valuation allowance, but is looking for some guidance. They have hired you to assist them with this
analysis. They have specifically asked for your guidance on what factors they should evaluate when determining whether to record
a valuation allowance. Provide a list of factors and then provide a list of questions you might ask the Company to begin putting
together a memo to reach a conclusion about whether a valuation allowance is required.
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