Deck 6: Valuation of Assets and Equities

Question 1

Choose the correct ancer. The GAAP concept that values assets at what an organization paid for them at acquisition is termed:

A) Fair market valuation
B) Objective measurement
C) Replacement cost basis

Answer 1

Objective measurement

Question 2

Describe four methods for valuing assets and explain the strengths and weaknesses of each.

Answer 2

1) historical cost: measures the amount paid for an asset when acquired. It is objective, but the asset is rarely reflective of actual worth, meaning the organization's true worth is not reflected.
2) Price-level adjusted historical cost: measures asset at historical cost but adjusted for inflation. Maybe more accurate, but no way to know if inflation affects each asset in same way.
3) Mark-to-market: used to measure financial assets, and is based on values provided from financial markets. It is more accurate than measuring at cost, but subject to potential large swings during times of volatility.
4) Net realizable value: measures asset value at how much it could be sold for, including net of any sales costs. Although more realistic perhaps, there is no objective measure for potential sale amount.
5) Replacement cost: measures asset value at how much it would cost to replace. Again, more realistic perhaps but less objective.
6) Future profits: measures asset value based on expected future profits generated from that asset. There is no objective measurement of these future profits.

Question 3

Match the terms with their descriptions.

-__ historical cost

A) measures an asset's value at how much it would cost to replace.
B) measures an asset's value at how much an organization paid to acquire an asset.
C) measures an asset's value based on market values.
D) measures an asset's value based on the expected amount of income (less applicable expenses) an asset would generate.
E) measures an asset's value at how much it could be sold for, including net of any sales costs. f) measures an asset's value based on how much it cost adjusted for changes in inflation.

Answer 3

measures an asset's value at how much an organization paid to acquire an asset.

Question 4

Match the terms with their descriptions.

-__ mark-to-market

A) measures an asset's value at how much it would cost to replace.
B) measures an asset's value at how much an organization paid to acquire an asset.
C) measures an asset's value based on market values.
D) measures an asset's value based on the expected amount of income (less applicable expenses) an asset would generate.
E) measures an asset's value at how much it could be sold for, including net of any sales costs. f) measures an asset's value based on how much it cost adjusted for changes in inflation.

Question 5

Match the terms with their descriptions.

-__ net realizable value

A) measures an asset's value at how much it would cost to replace.
B) measures an asset's value at how much an organization paid to acquire an asset.
C) measures an asset's value based on market values.
D) measures an asset's value based on the expected amount of income (less applicable expenses) an asset would generate.
E) measures an asset's value at how much it could be sold for, including net of any sales costs.
F) measures an asset's value based on how much it cost adjusted for changes in inflation.

Question 6

Match the terms with their descriptions.

-__ replacement cost

A) measures an asset's value at how much it would cost to replace.
B) measures an asset's value at how much an organization paid to acquire an asset.
C) measures an asset's value based on market values.
D) measures an asset's value based on the expected amount of income (less applicable expenses) an asset would generate.
E) measures an asset's value at how much it could be sold for, including net of any sales costs. f) measures an asset's value based on how much it cost adjusted for changes in inflation.

Question 7

Match the terms with their descriptions.

-__ future profits

A) measures an asset's value at how much it would cost to replace.
B) measures an asset's value at how much an organization paid to acquire an asset.
C) measures an asset's value based on market values.
D) measures an asset's value based on the expected amount of income (less applicable expenses) an asset would generate.
E) measures an asset's value at how much it could be sold for, including net of any sales costs. f) measures an asset's value based on how much it cost adjusted for changes in inflation.

Question 8

Match the terms with their descriptions.

-__ price-level adjusted historical cost

A) measures an asset's value at how much it would cost to replace.
B) measures an asset's value at how much an organization paid to acquire an asset.
C) measures an asset's value based on market values.
D) measures an asset's value based on the expected amount of income (less applicable expenses) an asset would generate.
E) measures an asset's value at how much it could be sold for, including net of any sales costs.
F) measures an asset's value based on how much it cost adjusted for changes in inflation.