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Valuation of Current Assets

Valuation Methods

Historical Cost – this is the original cost of the asset.

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It is a reliable basis because it is a historical event verified by purchase records. This is generally used by GAAP.

Current Market Value: Generally the price obtained in the market place between a willing buyer and a willing seller. GAAP discourages the use of current Market Value because they can be hard to obtain and or verify. FFSC allows them.

Valuation Methods recognized by the FFSC

  • Historical Cost Method : Applies the amount paid for the asset.

  • Current Market Value Method – applies an estimate of how much cash that could be obtained from selling the asset in an orderly liquidation. Orderly Liquidation – it is an exchange in which the buyer and the seller are not forced into the transaction.
  • Net Realizable Value Method : this applies the selling price minus any direct selling costs. This method is good for raised crops and livestock.
  • Discounted Cash Flow Method : applies an estimate of cash inflows and out flows from using the asset of the estimated life of the asset.
  • Relevance : the capacity of information to make a difference to parties that make decisions based on the information.
  • Reliability : Ability of the information to truly represent what it says it represents, verifiable by another party, and unbiased free of errors.

Cash

  • Bank Statement: reports all of the cash transactions that have passed through the bank.
  • Deposits in transit : cash amounts that have been deposited but are not on the bank statement because they haven’t cleared the bank yet.

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  • Outstanding Checks : outstanding checks are checks written but not cleared by the bank because the haven’t been deposited yet or because the bank did not process check befoe the bank statement was issued.
  • Bank Charges : charges by the bank against the farm bank account. These could be service charges, nonsufficient funds, electronic fund transfers, or other services performed by the bank.
  • Bank Credits : collections, or deposits made by the bank on behalf of the farm account. This could be interest earned on interest-bearing accounts, money collected and deposited into the account directly at the bank.
  • Errors : can occur for several reasons by either the bank or the farm accountant. To check for errors, the farm accountant verifies the amounts of deposits and checks.
  • Bank Reconciliation Schedule : A table explaining the differences between the bank statement and the ledger account.

Accounts Receivable

  • Bad Debts : These are debts that others owe to the farm business that the farm may not receive. Also known as uncollectible accounts.
  • Direct Write-off Method : the farm accountant uses this method to adjust farm accounts when they are certain they will not receive the money they are owed.
  • Allowance Method : The Balance sheet reports accounts receivable adjusted for an estimate of lost income from bad debts before notification occurs.

Inventory

  • Net realizable value NRV: the estimated sale price of inventory the farm business has. Less any direct selling costs.
  • Inventories raised for sale: this category includes crops, market livestock, and feed that is not intended to be fed to livestock. NRV values would work for these inventories because the cost of raising can be hard to determine.
  • Inventories Raised for use: this includes feed intended for use not sold. These inventories do not meet the criteria for NRV valuation.
  • Inventories Purchased for Resale: this includes, feeder livestock, feed, crops, livestock that will produce something to be sold (eggs, milk, wool). This category can meet NRV regulations and can be used when cost or market value is not available.
  • Inventories Purchased for Use: large amounts of seed, fertilizer, fuel, and other supplies that could be recorded as inventory purchases rather then expenses. They are purchased only for use in production.

Sometimes difficulty arises when purchased and raised inventories are mixed together. Cattle can be separated but when grain or feed is mixed it is impossible to separate. If there are different purchase prices for the inventories on hand then you could use the Last-in-First-Out.

Last-in-first-out: with this method you use the most recently occurring purchase price to value the sold assets. The inventory that remains is valued at the oldest purchase price.

First-in-first-out: this assumes that the first part sold is from the first batch purchased so it is valued at the fist purchase price. Remaining inventory is then valued at the most recent purchase price.

Weighted average method: this computes an average cost by taking the multiplying the number of units by the price per unit for each of the purchases, then adding the dollar amounts of the purchases and dividing by the total number of units.

35 head x 250 = 8750

+ 50 head x 270 = + 13500

85 22250 22250/85 head = 262 per head.

Prepaid Expenses – prepaid expense are recorded and valued only at cost.

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Valuation of Current Assets. (2019, Dec 16). Retrieved from https://studymoose.com/valuation-of-current-assets-essay

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