Asset Valuation Paper

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.