Asset Valuation Paper

  • Length: 1775 words (5.1 double-spaced pages)
  • Rating: Excellent
Open Document

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

Text Preview

More ↓

Continue reading...

Open Document

Asset Valuation
Accounting for Managerial Decision-Making

Introduction
To start a new business and remain in business profitably, many critical decisions must be made when the foundation of a new business is formed. These decisions affect the company in the long run and often make or break an organization. Methods of inventory control and capitalization policies are among these critical decisions that will affect any business bottom line.
Our team has investigated these policies and will present our recommendation for the method of inventory and capitalization policy for the XYZ Mattress Store in the remainder of this paper.
Inventory Policy
Selecting the valuation method for reporting and valuing is based on key issues relating to the relevance and reliability of the method of accounting for that item. According to finetuning.com (2005) "how you identify items in inventory and determine which have been sold will depend on the nature of the products, the volume of the products, how they are tracked, and inventory rotation." Key factors to consider under the inventory policy are: location of storage facilities, temperature, security, rotation of stock, cost, training, periodic inventories, and control.
caycon.com (2005) wrote: "Valuing a startup is intrinsically different from valuing established companies. Because of the high level of risk and often little or no revenues, traditional quantitative valuation methods like (P/E) per-share earnings comparables or discounting free cash flows are of little use. Startup valuations are largely determined based on qualitative attributes." To select an inventory valuation method, the options are FIFO, LIFO and Weighted Average.
The valuation method for (FIFO) First-in, first out: Answers.com (2005) defines this as a "common method for recording the value of inventory. It is appropriate where there are many different batches of similar products." This method describes the first item coming in will be the first item going out of the inventory. Retailinventories.com (2005) wrote "cost flow assumption assumes that the oldest inventory is sold first. The ending balance of inventory is valued at the most recent purchase price. FIFO produces a more relevant balance sheet since the ending balance in inventory reflects its current value." An example of this would be: Ending balance in inventory would be 30 units of the most recent purchases. 30 x 300=9,000 E/B = 9,000.

Need Writing Help?

Get feedback on grammar, clarity, concision and logic instantly.

Check your paper »

How to Cite this Page

MLA Citation:
"Asset Valuation Paper." 123HelpMe.com. 20 May 2018
    <http://www.123HelpMe.com/view.asp?id=163714>.
Title Length Color Rating  
Risk Management in Stock Valuation and Markets Essays - Introduction Investor’s investment decisions are based on the valuation of stock which they conducted before making the decision. Generally investors prefer to invest in the undervalued stocks and sell their holding of stocks that they considered to be overvalued. There are many different methods of stock valuation. In addition, there are many factors which increases the risk related to the valuation of the stocks. This paper focuses on the fundamental analysis used for the valuation of the stocks....   [tags: investment decisions]
:: 27 Works Cited
1926 words
(5.5 pages)
Term Papers [preview]
Growth and Development of the Capital Asset Pricing Model Essay - Comparing and Contrasting Pricing Model In this paper I will discuss the growth and development of the Capital Asset pricing Model (CAPM).I will also identify and analyze the different applications to the CAPM. I will try and illustrate how the model can be used to form expected return and valuation measures. These illustrations will be informed by examples from stock options and restricted stock. Finally I will conduct a comparative analysis of the potential outcomes associated and comparative benefits and risks for using the CAPM versus the Arbitrage pricing theory (APT)....   [tags: economic/financial analysis]
:: 10 Works Cited
1949 words
(5.6 pages)
Term Papers [preview]
The Importance of Proper Asset Allocation Essay - According to Investopedia (Asset Allocation Definition, 2013), asset allocation is an investment strategy that aims to balance risk and reward by distributing a portfolio’s assets according to an individual’s goals, risk tolerance and investment horizon. There are three main asset classes: equities, fixed-income, cash and cash equivalents; but they all have different levels of risk and return. A prudent investor should be careful in allocating each asset class to his portfolio. Proper asset allocation is a highly debatable subject and is not designed equally for everybody, but is rather based on the desires and needs of the individual investor....   [tags: Asset Allocation Essays]
:: 6 Works Cited
1614 words
(4.6 pages)
Powerful Essays [preview]
Microsoft Corporation (MSFT) Finance Paper - Microsoft Corporation (MSFT) Company Overview Formed in 1975, Microsoft started by selling a BASIC interpreter which quickly established a reputation for excellence. As the popularity of Microsoft BASIC grew, other manufacturers adopted Microsoft BASIC's syntax to maintain compatibility with existing Microsoft BASIC implementations. Because of this feedback loop, Microsoft BASIC became a de facto standard, and the company cornered the market. Later, it tried (unsuccessfully) to extend their grip on the home computer market by designing the MSX home computer standard....   [tags: essays research papers] 1244 words
(3.6 pages)
Strong Essays [preview]
Effective Digital Asset Management Essay - Introduction “According to Forrester Research, American workers spend $404 billion annually, or 11% of all U.S. wages, looking for the information they need to do their jobs. Giving employees the right tools to stay afloat in a data and knowledge-driven workplace is imperative across the board.”[1] With the world of digital data growing exponentially year on year, the above quote could just represent a mere drop in the ocean when accounting for the time workers spend looking for information....   [tags: Digital Asset Management]
:: 6 Works Cited
2896 words
(8.3 pages)
Powerful Essays [preview]
Inventory Valuation for Decision Makers Essay - Inventory valuation is one of the factors that decision makers have to consider before making any decision in their business. They can know how different inventory assumptions affect the cost of good sold and the resulting net income. Inventory valuation is value a company allocates to its inventory in storage and when it is sold. There are several methods to calculate the inventory values to know how much they cost. These methods are specific identification, cost average, first in, first out (FIFO), and last in, first out (LIFO)....   [tags: sterage, sold, cost, methods, average] 2295 words
(6.6 pages)
Powerful Essays [preview]
Discounted Cash Flow Valuation Essay - The purpose of this paper is to give a clear understanding of discounted cash flow valuation. The paper will explain what a discounted cash flow valuation is and its importance in financial business decisions regarding investment strategies. This paper will give a detailed discussion about discounted valuations for both present and future multiple cash flows with respect to even and uneven schedules using clear step-by-step examples. Also included will be some advantages and disadvantages in using the discounted cash flow valuation method for corporate business....   [tags: fianancial business, financial analysis]
:: 5 Works Cited
1092 words
(3.1 pages)
Strong Essays [preview]
Equity Valuation of WalMart Essay - EQUITY VALUATION – WALMART Equity valuation is a major tool used to analyse investment choices using the company’s past and current performance, in addition to its business plans, in order to forecast its future financial position and valuate the stock. This paper will examine and valuate Walmart based on my projection for the company’s performance over the next few years. SECTION I Wal-Mart Stores, Inc., branded as Walmart and traded on the NYSE as WME, is a multinational retail corporation headquartered in Bentonville, Arkansas (United States)....   [tags: Major Tool, Analyze Investment Choices, Company]
:: 19 Works Cited
2456 words
(7 pages)
Term Papers [preview]
Essay on Property Valuation - Valuation of real estates or properties basically, refers to appraising a property or a real estate to form an opinion about the value of the property. This value is normally the properties’ market value. Properties are heterogeneous in nature; meaning they are not all identical or alike and thus, they have different values. However, it is possible to get a range for the values. There are some obvious factors like physical locaction of a property that automatically makes the market value of different properties differ....   [tags: Real Estate ]
:: 8 Works Cited
2544 words
(7.3 pages)
Term Papers [preview]
Essay on Property Valuation - Introduction Valuation of real estates or properties basically, refers to appraising a property or a real estate to form an opinion about the value of the property. This value is normally the properties’ market value. Properties are heterogeneous in nature; meaning they are not all identical or alike and thus, they have different values. However, it is possible to get a range for the values. There are some obvious factors like physical location of a property that automatically makes the market value of different properties differ....   [tags: Real Estate, Property]
:: 11 Works Cited
2320 words
(6.6 pages)
Term Papers [preview]



The strength of FIFO would be a rise in net income and the weakness would be a decrease in cash flow (Marshall, 2003).
The valuation method for (LIFO) Last-in, first out: Moneycentral.com (200 describes LIFO as "a method of valuing your inventory that assumes any inventory you sold was from the last inventory you purchased." Retailinventories.com (2005) wrote "the cost flow assumption assumes that the newest inventory is sold first." The ending balance in inventory is valued at the oldest purchase price. When the cost lowers, this method will give results of a higher cost of sales. The strength of LIFO is used to save money in taxes. The weakness of LIFO will produce the lowest net income in inflationary times.
The valuation method for Weighted Average is best suited for companies that carry like items in their inventory similar to our mattress retail store. Realinventories.com (2005) wrote, "Weighted average divides the total cost of goods available for sale by total units available for sale, then multiplying by the ending balance. Average is assigned a weight. These weightings determine the relative importance of each quantity on the average. Weightings are the equivalent of having that money like items with the same value involved in the average." The strength of weighted average method is that there is no way to manipulate income. The weakness of a weighted average method is not good to be used on the different types of inventory (Marshall, 2003).
The current economic environment (Inflation/Deflation) plays a major role in the selecting the correct method of inventory valuation. "In the time rising cost, LIFO results in lower ending inventory and higher cost of goods sold than FIFO. These changes occur because the LIFO assumption results in most recent, and higher, costs being transferred to cost of goods sold. When purchase costs are falling, the opposite is true" (Marshall, 2003). After carefully examining the above inventory methods, considering the current rebounding economy, Team A Consulting recommendation is the use of LIFO inventory method.
Capitalization
One of the most important aspects to reporting and valuing assets is a company's capitalization policy. Investopedia.com (2005) defines capitalization as "where costs to acquire an asset are included in the price of an asset or the sum of a corporation's stock, long-term debt and retained earnings." An example of capitalization would be our mattress retail store spending $10,000 for purchasing several mattresses then spending an additional $2,000 on proper storage equipment for these items. In accordance with capitalization the company must include both costs in the corporation's total assets.
According to Investopedia.com (2005) the definition of capitalizing is a "method used to delay the recognition of expenses by recording the expense as a long-term asset." A mattress retail store would want to capitalize long-term items such as cash registers, additional storage space, and distribution vehicles. Yes, the company could attempt to capitalize on new economic mattresses but these items are normally not kept in stock for long periods of time. This would create a false representation of the corporation's actual revenue.
Developing a capitalization threshold is a simple process. We must first look at what items we will have on hand for a long period. These items would include exotic mattresses, high-dollar headboards, and waterbeds. The one important aspect to remember is to ensure the organization includes these items as well as permanent property such as machinery, buildings, and other durable items. The organization must then determine the average price of the elements in order to determine an accurate threshold (Marshall, 2003).
The next step in ensuring that the company has developed an effective capitalization policy is to determine when to use different depreciation methods. Marshall (2003) wrote, "For purposes of reporting to stockholders, most firms use the straight-line depreciation method because in the early years of an assets life it results in lower depreciation expense and hence a higher reported net income than accelerated depreciation." Related to the fact that straight-line depreciation decreases the net worth of a product slowly over time as opposed to the expedient depreciation, which is caused by the usage of the accelerated format the straight-line method is the best course of action for a retail mattress company.
The rationale for this is that modern technology does not allow for many items to be continuously sold to the public over a certain length of time. When an item remains close to its original value for the beginning of its life span it is cost-effective to the organization. In conclusion, since all items will either be sold or outdated shortly after their original manufacturing date the straight-line depreciation method is recommended.

Justifications for an Inventory and Capitalization Policy

Capitalization and inventory policies are necessary in order to ensure compliance with Generally Accepted Accounting Principles (GAAP); to establish procedures for the management and control of assets owned. The purpose of a fixed asset inventory policy is to have an understanding of the method used to gather and maintain information needed for the preparation of the company's financial statements as well as providing control over the accounting systems. An asset capitalization policy is necessary to establish a reasonable capitalization threshold for all types of assets. A threshold on the asset capitalization would assist a company in determine whether an asset should be reported on a balance sheet (Capitalization, 2005).
Alternative methods of Valuation
There is a distinction between price and value. Price reflects what investors expect to collect and value implies that the investor believes something different from what the market believes. It would be important for the investor to understand where the market stands as to value. Valuation could be described as investors trading cash today for future claims on the cash flow (Credit, 2001). Two alternative approaches are used for valuing capital-investment decisions. "The first and most widely used for project-oriented capital investments discounts the after-tax free cash flows by the weighted-average cost of debt and equity (capital) to determine if the results will yield a positive net present value" (Harris, 2000). The main alternative used is known as the equity residual (ER). This method values the remaining cash flow (after debt-service) to equity, which is discounted by the cost of equity.
The significant difference in the 2 methods is the treatment of financial leverage and the effects the debts use on value. "When determining the value of a business enterprise, there are three general approaches available to the valuation professional: the market approach, the income approach, and the asset approach. These are also commonly referred to as the market capitalization, discounted cash flow and adjusted book value approaches, respectively. The choice of which approach to use in a particular situation will depend upon the specific facts and circumstances associated with the company, as well as the purpose for which the valuation analysis is being conducted" (Valuation, 2005).

Conclusion
The XYZ Mattress Store faces many challenges as it makes the many decisions that are required when starting up a new business. When evaluating the mattress business one must decide on what method of inventory control and capitalization will be used. The inventory method that we encouraged was the LIFO (Last In, First Out) method, which allows for the company to lower the impact of taxes owed. This is crucial to a start up as most start up companies expect losses in the first year. When determining a capitalization threshold for the store, we chose to use the straight-line method of depreciation to utilize the value of our products over a period of time. These decisions and other variables will determine if XYZ Mattress Store will survive this very competitive market.

References
Answers.com. (2005). Weighted mean. Retrieved September 8, 2005 from
http://www.answers.com/weighted%20average

caycon.com (2005). Retrieved September 8, 2005 from http://www.cayeneconsulting.com

Capitalization and Inventory Control. (2005) Retrieved September 10, 2005 from
http://www.umassp.edu/policy/fiscal/inventory.html

Credit Sussie. (2001). An epistemological view of valuation. First Boston.

Finetuning.com. (2005). How to account for inventory, for income tax. Retrieved September 8, 2005 from http://finetuning.com/articles/p0-2400-how-to-account-for-inventory-for-income-tax.com

Harris, R.S. (2000). A comparison of the weighted-average cost of capital and equity-residual approaches to valuation. University of Virginia: Daden Business Publishing Darden School Foundation: Charlottsville, VA.

Investopedia (2005). Capitalization. Retrieved September 9, 2005 from http://www.investopedia.com/terms/c/capitalization.asp.

Marshall, D. et al. (2003). Accounting: What the numbers mean. New York:
McGraw-Hill.

Moneycentral.com. (2005). Taxes. Retrieved September 8, 2005 from http://www.moneycentral.msn.com/taxes/glossary.asp

Retailinventories.com (2005). Retail inventories. Retrieved September 8, 2005 from http://www.retailinventories.com

Valuation Methodology. (2005). Retrieved September10, 2005 from
http://ls.wustl.edu/Students/Courses/Lehrer/Spring2004/CourseMat/Valuation%20Methodology.htm


Return to 123HelpMe.com