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Ch 21 Valuation of Balance Sheet - Coggle Diagram
Ch 21 Valuation of Balance Sheet
Historical Cost and Fair Value
The
historical cost
approach uses information that is objective and verifiable and documents an actual exchange transaction. -
Weakness: Outdated information
Fair Value:
Measures assets using updated values
For financial assets, these values are often based on directly observable public trading prices; however, some other assets are valued on indirect measurements that involve a significantly greater amount of assumptions and estimates
Weakness: less accurate information
Net Realizable value
measures assets at what you could get if you were to sell them
Weakness: may be based on subjective estimate
An asset can also be valued at the future profits the firm expects to generate from its ownership.
Weakness: may be based on subjective estimate
The
replacement cost
approach measures assets at how much it would cost to replace that asset.
Replacement cost is often referred to as current cost.
Weakness: may be based on subjective estimate
Measurement: Takeaway
Under our system of accrual accounting using the accounting equation, changes in balance sheet items flow through the income statement and therefore
affect net income.
Balance sheet items valued based on less reliable current cost/values affect firms income
BE AWARE
: that financial accounting numbers are produced by a wide variety of unrelated measurement approaches.
Depreciation Methods
Straight-line method
Units of production method
Double-declining-balance method
An accelerated depreciation method expenses more of the asset's cost near the start of an asset's life and less at the end of its useful life
The main accelerated method of depreciation is the double- declining- balance method.
The double- declining balance method multiplies an asset's decreasing book value by a constant percentage that is twice the straight-line depreciation rate.
The Units of production method allocates a varying amount of depreciation each year based on the asset's usage.
When a plant asset's usage varies by year the units - of- production method better matches expenses with revenues.
The straight-line method allocates an equal amount of depreciation to each year.
Depreciation expense is reported on the income statement.
The book value of the asset, cost minus accumulated depreciation, is reflected on the balance sheet.
How are disposals of assets recorded?
Eventually, an asset wears out or becomes obsolete, The business then has several options
Discard the plant asset.
Sell the plant asset
Exchange the plant asset for another asset
Regardless of the type of disposal, there are four steps.
1) Bring the depreciation up to date.
2) Remove the old, disposed-of asset and associated accumulated depreciation from the book
3) Record the value of any cash received (or paid)
4) Determine the amount of any gain or loss.