Question

What does valuation mean in accounting? What is a valuation method as it pertains to an account? To what accounts do valuation apply? Identify and explain the two measurement principles per the FASB conceptual framework. Explore and come up with the correct valuation method for each of the following balance sheet line items. Moreover, why are these accounts reported on the balance sheet at these values? 1. Inventory 2. PPE 3. Intangible assets 4. Notes Payable, short-term 5. Bonds Payable, long-term 6. Notes Payable, long-term 7. Common Stock 8. Additional Paid-in Capital 9. Treasury Stock

Answer 1

Definition of Valuation in Accounting:

Accounting valuation is the process of valuing company's assets and liabilities in accordance with the Generally accepted accounting principles (GAAP) for Financial reporting purpose

Examples of accounts for which valuation apply:

Allowance for doubtful debts

Accumulated depreciation

'Allowance for obsolete inventory etc

FASB: (Financial accounting standards board)

The objective of FASB is identify the goals and purpose of financial reporting

Measurement principles as per FASB framework as follws:

1) Historical cost

2)Current cost

3) Realizable value

4) Present value

Historical cost is the most commonly used principle out of four principles

the main advantage of Historical cost model is its simplicity and certainty

Valuation method for each of the Balance sheet line Items:

1) Inventory:

Inventory is valued using different valuation methods such as FIFO, LIFO

FIFO: this method assumes the first unit making its way into inventory is first sold( simply the meaning is first in first out)

LIFO: This method assumes the last unit to arrive in inventory is sold first.

2) PPE:

Property plant and equipment is recorded on company's financial statements

PPE is initially measured according to its historical cost it includes Purchase price ,transaction fees,and any improvements made to asset to bring it to the desired use

3) Intangiable asset

Three general approaches for valuing the intangialble asset

cost approach

market value approach

income approach

4) Notes payable short term:

In case of notes payable ,first the company treats notes payable as short term liability if the duration is with in one year

5) Bonds payable longterm:

A bonds payable is just a promise to pay a series of payments over time (the interest payment) and fixed income at maturity

generally bonds payable payable falls in long term class of liabilities

Bonds are issued at a premium ,at discount and at par

Bonds issued at premium: Here the carrying value of bond is higher than the face value of the bond

Face value of bond is to be valued as bonds payable in balance sheet

Bonds issued at discount: Here the carrying value of the bond is less than the face value of the bond

Bonds issued at par: Here the carrying value of the bond is equal to the face value of the bond

We receive cash for fair value of the bond, in case of any positive difference we value that as a premium and in case of any negative difference we value that as a discount

6) Notes payable long term:

Generally notes payable is a promissory note offered by the lender to the borrower

I n case if notes payable is due after 12 months or more then those notes payable are considered as long term and the same is long term liability

7) Common stock:

Common stock refers to par value of the stock

there is no effect with the market value of stock

common stock is valued at the balance sheet at actual figures

8) Additional paid up capital:

The difference between the price which is paid by the investors for shares and par value of the investors is refered as additional paid up capital

we will account/value under shareholders equity on the balance sheet

9)Treasury stock:

Treasury stock is the contra equity account

Treasury stock means numbers of equity shares purchased from the open market , which reduces the shareholders equity to the extent of amount paid for acquiring the stock

Treasury stock is recorded under shareholders equity in balance sheet

The above all items falls under eithe assets or liabilities hence we are accounting or valuing the same in Balance sheet