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

Question

Quizplus · Accepted Answer

The Answer is 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.

Describe Four Methods for Valuing Assets and Explain the Strengths