(Solved Homework): You are a controller at a company that uses various valuation bases. The newly hired CEO does not h…

You are a controller at a company that uses various valuation bases. The newly hired CEO does not have an accounting background and wants to understand the company’s various valuation bases used in GAAP. She has requested that you write a memo to her discussing the various valuation bases used in U.S. GAAP including historical cost, fair market value, liquidation value, replacement value, and depreciated or amortized cost.

Also include in your discussion when is it appropriate to use these different valuations. For each basis in your memo include the basis definition, describe in general terms when it is proper to use the basis, then critique the advantages and disadvantages of it its use.

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Expert Answer

MEMO FOR VALUATION

Historical Cost: Historical cost represent the cost of purchase at historical price. This is actual purchase cost of the assets.

Fair Market value: This is a value where a buyer intent to buy that price to seller. Probable price at which a willing buyer will buy from a willing seller when both are unrelated.

This is a price at which buyers and sellers with a reasonable knowledge of pertinent facts and not acting under any compulsion are willing to do business.

Liquidation Cost: This cost is the cost of winding of assets or business such as court fees , liquidator fees, Administration cost pertaining to liquidations.

Replacement Cost: This cost refer to the amount required to pay to replace the assets at the present time. A replacement cost is the cost to replace an asset of a company at the same or equal value, and the asset to be replaced.

Amortized cost: is that accumulated portion of the recorded cost of a fixed asset that has been charged to expense through either depreciation or amortization. Depreciation is used to ratably reduce the cost of a tangible fixed asset, and amortization is used to ratably reduce the cost of an intangible fixed assets.

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