HOW SHOULD A LIMITED COMPANY VALUE IS FIXED ASSETS IN ORDER TO BASE INFORMATION THOSE WHO USE ITS FINANCIAL REPORTS.
Definition of terms.
Users of financial statements.
Methods of valuation.
Net realizable value
Fixed assets are also known as long-lived assets. Operational assets plant assets or properties plant and equipment. Being more or less pertinent in nature, they are not connected into cash instead they are kept into eh business to assist revenue making activities for several years beyond the balance sheet data.
Separately: plant assets are a major investment for most companies. They make up large part of assets on the balance sheet and they yield depreciation, often one of the largest expenses on the income statement. They also affect the statement of cash/ lows when sash is spent to acquire plant assets or received from their sale. When companies acquire or balled aplenty asset it is oven referred to as “a capital expenditure: then expenditure is good news to the company because it impacts long term and short term success of the company.
Plant assets are tangible assets that are used in the operations of accompany and have a useful life of more than one accounting period. They are set aside purposely for operations and not like inventories that are held for sale. Secondly, plant assets have a useful life of expenditure over more than one accounting year period. This too differentiates it from other assets that are usually consumed in a short time after they are placed in use e.g. supplies prepaid.
Secondly, in category is natural resources, natural resources are assets that are physically consumed when used such as standing timber, mineral deposits and oil and gas fields because they are consumed when used, they are often called washing assets. The natural state of these assets represents inventories of raw materials that will be converted into a product by cutting, mining or pumping. But until that conversion takes place, they are no-current assets and reported in a balance sheet using titles such as timber lands, mineral deposits or oil reserves.
This is an economic consideration measured on the cost or worth of a product at a time of purchase or sale. In principle accountants are required to record assets on the basis of the dollars that have been used to buy their economic resources. It approximates market value of an asset or service when it is acquired. As an illustration equipment. The value of that equipment should be recorded as $ 5000 s its cost in the books of the accounts.
A limited company is a body corporate that is on aggregation of persons and individuals, arising by state or Royal charter havarity the status of a separate bearing or persons, its ability of whose members is limited according to circumstances.
The type of limited company which are often referred to is that formed is that formed by the companies act 1948 and 1961 which required that the company may have a share capital with a liability of the shareholders limited to the amount remaining unpaid on the shares for which they have subscribed or the liability being limited to the amount members agree in the form of guarantee.
Limited companies must be considered to as separate being irrespective of the individual who have subscribed the necessary capital. Therefore it able to sue and be sued, hold land carry on business.
When we talk of financial statement, we mean those statements that reflect the state of the business as at that date. Mostly it is prepared once a year or on quarterly and may be on demand. It must be the operation of going concern representing a period that has past and hence a state of “ for the year ended or as at….” The free most important financial statement are the balance sheet, income statement and the cash flow. Their main significance to the company. Management and outsiders or what we call as interested parties is the relevant information necessary to make a decision about taxation, profit and security historic cost.
Managers are liable to the customers, Suppliers and owners and even the investors as regard to the suitability of the business. It is assumed that in no given circumstances should the business stagnate that is why it is always regarded as a going concern separate from the owners. In fact in law it is regards as a person.
All assets iwbed by the company are recorded at the price at which they were purchased. This price is known as the cost price or cost value. This price is retained in the books of the firm through out the useful life of the product until it is depreciated or revalued. It must exist in the asset account even if the market or current value has gone up. That explains the cost of historic cost, the original price that was agreed upon between the buyer and the seller.
Historical cost or cost principle assures the readers of the financial statements that their assets are reported on the balance sheet on the basis of what it cost the business to obtain them. The best example is a piece of land that cost a firm ten years ago and 100,000; the historic cost requires that the accountants or rather manager report the same on $100,000 even if now it is worthy $ 500,000.
Under the cost method assets an reported at their amortized cost. Market value changes an most recognized until tat is an a actual transaction (sale). Only dividends and interview received from the inverted and realized gains and losses are recognized.
At acquisition, therefore, the company reports the purchased item (assets) on th balance sheet at the acquisition cost as follows.
Investment in company A $200 and the end of period maybe one year the receiving company sales the investment at a mark up of $40 and therefore the sale prices becomes $240. This company call it P which remits $40 to the owner of investment company A as dividend. So $ 200 remains in the book of company A as the cost price throughout its useful life.
Historical cost or cost principal therefore assures the users of the financial statement that their assets are reported on the balance sheet on the basis of what it costed the business to obtain the.
There are limitations that should not be overlooked.
This is a reduction of cash payment towards a purchase of a given asset. It therefore reduces the marked price of an asset and therefore that cash paid out of pocket because the historical cost e.g.
invoice price sh. 235800
purchase discount 4200
total cost of asset. 231600
) any transaction cost incurred outside the invoice price most be added e.g.
Transportation in 23300
total cost $233900
Any modification to the asset that adds value to the product and therefore that too must increase the cost e.g.
Total cost $239900
The total cost (History cost) of that asset now is recorded at $ 239900 and not 235800 which was regarded as the invoice price. So the objective’s principle simply is the recording at all accounting transactions supported by a business paper called a source document, market value.
In trading activities, most companies value their good on the price that exist ion the market. It does not take into consideration on what it cost the firm in acquiring that asset but the prevailing price at that time.
Every good example to this elect is trading in shares or securities companies report the entire set of trading securities companies at their fair or market values with a fair value adjustment to the cost of the set. The resulting unrealized holding gain or losses from changes in the market value for the set of securities from one period to another are reported on the income statement as part of net income statement as part of net income or loss.
What we are saying is that the market is dynamic (changing) so the price adjustment is predominant either using or falling. It is therefore necessary for limited to the adjust the entire set of its securities to the prevailing price or what is called market price or fair value.
Market value is influenced by the a variety of factors, which include expected future earnings how much will be the gain after selling that particular asset secondly dividends the so called profit the distribution of an income by the shareholders, third growth the expansion of that asset or what we call the expansion of that asset or what we call as the business empire, forth the competing companies and lastly the economic event taking place at that time. As an illustration of the above explanation let us take the following example.
The book value of being long term debt was $ 2630 as at Dec 1993, etc. market value was $28,870 or 9% higher. The Dec 31 1994 book was $2609: its market value was $ 2486 or 5% low. Thus the Belling had to collect its long-term debts. Thus the 1994 marked value relative to its book value declined 14%, which of course should be the amount worthy and if paid for should be reported in the financial statement of the company at the time of reporting.
The third and last method of valuation of assets in a limited company is net realizable values. This method of valuation is used on damaged goods and obsolete, goods that are not counted in inventory because generally they are not of any economic use. So often manager report this assets at scrape value as away of disposing them of from the books of accounts and its physical existence net realizable value can be defined as sales price minus the cost of making this sale. Managers indeed can not give proper estimate of the product that is why its profit or loss is waged between the cost of making the sale and its value at the time of sale.
In cases of a production plant its yearly depreciation is regarded as an expense on that account, so it keeps the cost of that asset reducing from year to year. If managers did not specify its useful life, the production would be in operation until its scrap value is nil. So to dispose off this product, management decides on the value of the scrape at net realizable cost. The sum applies to wanting up institutions their assets in fact are sold out net realizable value this is due to not selling them at all or luck of storage and time because is choosing a way. So it becomes necessary when reporting this information at any financial statement at the cost of net realizable value.
In conclusion, we need to recognize that management accounting is the process of identifying, measuring and communicating economic information to permit informed judgments and decision making of the information. In other words the managerial is concerned with providing both financial and non-financial information that will help decision makers to make good decisions. This information should be communicated to the users and owners of this information in terms of the financial position or statement.
As a nature of fact this information should be in the form of statement selling prices, costs, demand, competitive position and profitability of various products that are made by the organization. It is therefore recommended that this information be sufficient to meet the needs of the various users-shareholders, who require information on the value of their investment and the income that is derived from their shareholding, employees who require information on the ability of the firm to meet wage demand and avoid redundancy, creditors and providers of loan capital require information on a firm’s ability to meet its financial obligation and the government agencies who wants the information on the sales a activity for the purpose of relations.
Various stakeholders and nature of information they needs
A company or an organization has many audiences for financial statement. Financial statement is useful to very many groups in the society. Different people require different types of information and this individuals or groups with different needs of information from financial statements affect the company or the organization in one way or another. Therefore stakeholders who are the audience in the financial statements are people who affect the company. Therefore a company must have a good connection between the financial statement and the audience in order for them to achieve cooperate goals.
The company’s relationship is measured by the strength of confidence the audience have in it through the information they get. To nurture trust confidence and cooperation an organization must give the write information to the users and this is what is being said. The following are the audience of a company, the type of information they need, the purpose of the information, and the nature of the financial statements they require.
To begin with, there are six types of stakeholders or audiences to the financial statements of a company each requiring different section of the information. The parties that require information for various purposes include: – shareholders, employees, customers, suppliers, the government, the community, and environment. These groups of people make the organization remain competitive and relevant in the society. When we talk of a community we may mean the whole world for a multinational.
A customer is the one who receives and consumes the company’s goods and it is the customer who makes the company to continue business in its lifestyle. They consume goods and services from the company and they expect the company to give a good which is of good quality and user friendly. The good must have the utility value for the customer and at a good price. This will enable the customer to be loyal to the company and ensure the competitiveness of the company’s product. The product ensures that the customer has certain perceptions about the company’s product. It is through the perception of the company that the customers will continue through patronizing the business.
The purpose and the type of information they need from financial statement include; pricing of the products, information about how much was spent for credit management, amount used in marketing, amount of cash discounts given, and amount used in giving out free samples. This information is available in financial statements of the company that is profit and loss account. They need this information to increase there awareness about the safety of the product they are consuming. The company communicates to them through the following means: – advertisement, trade and exhibitions, giving free samples, cash discounts, and offering credit facilities.
Suppliers are the people who give services or goods to the company. There are the most crucial for the survival of the company. Their confidence in the businesses of the company depends solely on how prompt the company pays credit facilities given to them and how regular they do business to the outside world. The type of information they need from the financial statements is the amount of credit the company has so that they can be able to ascertain the long term survival of the company and the liquidity of the company.
This information is available in the balance sheet, cash flow statement and profit and loss account; they are mostly interested in these three statements in order for them to be able to know whether they will be paid. The company communicate to this people through; letter, cheques, purchase orders, and through advertisements.
These are the owners of the business, they are the people who promoted the company or who started the business and there aim it to make profit and share it. They are the people who appreciate the investments made by the company; they are interested in all information available in the financial statements. The use liquidity information to know the long term survival of the company in question, they also are interested in the profitability of the firm so that they can know how much dividends is available for them.
The same group is also interested in the performance of the company through the management that is activities of the company. Therefore this is the most crucial members of the groups that need financial information. They get there information communicated through annual general meeting which is annually and it is through them that everybody including employees will have confidence in the company.
This are the most crucial people of the company, they receive salaries of the company they include the management of the company. They are interested in vast information ranging from letters of appointment, letters of dismissal, salary increment information and any other information that is available in the financial statements of the company they are working for. In the profit and loss account they need the profitability, the amount of salaries paid out, the amount of credit being held by the company, and how regular the company does business, they are interested in the amount of cash the company is holding. Therefore they need the financial statements including profit and loss account, cash flow statements, balance sheet and notes to the account.
The government is also a major stakeholder in the operations of a business; they need various types of information for various reasons. To begin with they need financial information of a company to be able to ascertain the amount of tax the company is supposed to pay, to be able to regulate the business. They all statements that are prepared by the company, they always ensure that the company does business as per the objectives that brought them into existence.
The community is interested in sustainable development, through the financial statement of the company the community will be able to know how much money was used in sponsoring communal projects, how many employees from the community, and how infrastructure was sponsored by the company. This information is available in the cooperate social responsibility of the financial statement of a company
These are people who are interested in the environment of the company. They are interested in information from the financial statements of the company on the section of cooperate social responsibility.
The valuation of assets determines all types of assets as required by these stakeholders. Through valuation of assets the company is able to make profits or losses and this is able to stakeholders transact with the company.
Hirt G.A, and Block S. (2001); Foundations of Financial Management,
Gershon M., and S. Ghon Rhee,(1984) “The impact of the Degrees of Operating and Financial Leverage on Systematic risk of Common Stock,” Journal of Financial and Quantitative Analysis.
Sterling, Robert R, (1970) Theory of the Measurement of Enterprise Income. Lawrence, KS: University Press of Kansas, 1970
White G.I., Sondhi A. C. and Fried D., (1997); The Analysis and Use of financial statements, Wiley.
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