Valuation of assets

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Intangible assets

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Tangible assets

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Fixed assets =DEPRECIATION

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 CONCEPT

A permanent fall in the value of fixed

assets arising through wear and tear from
the use of those assets in business.

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Depletion

Amortization

Obsolescence


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 objectives
To calculate proper profits.
To show the asset at its reasonable value
To provide for replacement of an asset.
Depreciation is permitted to be deducted
from profits for tax purposes.

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 Causes of
Depreciation
Internal causes:
wear and tear, natural resources usage,
inefficiency , maintenance, change in
production, restriction of production,
reduced demand, technical progress
External causes:
obsolescence and effluxion of time

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 Factors in measurement of
depreciation

Totalcost of asset
Estimated useful service life
The estimated scrape value.

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 Methods of recording depreciation

Straight line method or fixed installment

Declining charge method or diminishing or
WDV
Sum of years digit method
revaluation method
Annuity method
Depreciation fund method
Machine hour method/ Production unit
method

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 Straight line method or fixed installment

Under this method, the same amount of

depreciation is charged every year
throughout the life of the asset.
The formula = Total cost of acquisition - residual value
or
scrap value

Estimated life use full life of assets

r =R/C * 100;
r = depreciation rate
R = Amount of depreciation, C = Acquisition cost

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 Declining charge method or
diminishing value method
Under this method depreciation is charged
at fixed rate on the reducing balance every
year.

Formula r = 1-n √ S/C

S= Residual value
C = Cost of the asset

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Current assests = inventory

 The raw materials,

 work-in-process goods
 completely finished goods

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 INVENTORY SYSTEM

1. Periodical inventory system

2. Perpetual inventory systems

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INVERTORY VALUATION METHODS:

First-In-First Out (FIFO)

Last-In-First Out (LIFO)
Average Cost Method (AVCO)
Weighted average method(WAM)

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FIFO& LIFO

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Intangible asstes= good will

value of a company’s
+brand name +
good customer
relations+ good
employee relations +
proprietary
technology =______

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Nature of good will
Zoologically classified by JUSTICE RICH

Dog’s nature goodwill

Cat’s nature good will

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Rat’s nature good will

Rabbit’s nature goodwill

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 Factors affecting
Location

Nature of business

Time

Efficiency of management

Market condition

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 Methods
1. Average Profits Method
2. Super Profits Method
3. Capitalization Method
Capitalization of Average Profits Method
Capitalization of Super Profits

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 Average Profits
Method

Goodwill = Average Profit * No. of Years Purchased

Average Profit = Total Profits/ No. of Years

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 Super Profits
Method
Goodwill = Super Profit * No. of Years Purchased
Where,

Super Profit = Actual Average Profit – Normal Profit

Normal Profit = Capital Employed * Normal Rate of Return

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 Capitalization
Method
1. Capitalization of Average Profits Method

Goodwill = Capitalized Value of Average Profits - Capital Employed

 Where
Capitalized Value of Average Profits = Average Profits X
(100 / Normal Rate of Return)
Capital Employed = Assets – Liabilities

2. Capitalization of Super Profits

Goodwill = Super Profits X (100/ Normal Rate of Return)

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