Question

Under GAAP, companies may apply various valuation methods in recording transactions and preparing financial statements, for example historical cost, fair market, replacement, depreciated or amortized cost, etc. For each basis in your discussion, cover its definition, describe in general terms when it is proper to use it, and critique the advantages and disadvantages of its use. Address the issue of why we should (or should not) use so many different valuation bases in GAAP. Is it accurate to claim that GAAP is still based on historical cost?

Answer 1

Page 1 By using GAAP, companies may apply various valuations such as histosical cost, fait market, seplacement, depreciated of amortized cost etc..) Historical Cost: This is a measure of value in accounting in which the value of an asset is recooded as its original cost of the money actually paid for the assets, as aquited by the company. This method is generally used by the company for valuing fixed assets. * As per GAAP assets should be recorded of historical cost, the poinciple behind this method of accounting is that the charge in value of assets in form of physical deterioration is recorded through depreciation of amortization. * The advantage of using the value of above method is that it's easy to calculate & reliable & fair market, this is a method where the price at which the property would change hands . between a willing buyer and a willing selles, neither being under any compulsion to buy of to sell & both having seasonable knowledge of belevant facts. In other words, the porce at which the property could be sold or putchased in an open market.

- Page 2 * This is the fair value of the asset which is generally recorded in the balance sheet at the time of sale or purchase of asset, or diversion of business. * Replacement: - Under this method, the value of the assets is recorded at which the assets can be beplaced by the other one at the present time according to its current worth. & This method is generally used when where the company wants to replace the assets with new one. * Depreciateda Under this method the value of assets is recorded at the current value ineo, assets when bought at market value, then change in the value of assets due to physical deterioration, It's use in the form of depreciation, the value achieved after reducing dep- reciation from the original vakee of assets as on depreciated value of asset.

Page-3 * This method is generally used to know the current value of the assets as on current date. * Amortized cost: Amortized cost is that accumulated portion of the recorded cost of a fixed asset that has been charged to expose through either depreciation or amortization. * It generally reflects the consumption of intangable / tangable assets over its weful life. It is very much similar to depreciation.