Question

Module 4 Discussions

Please choose at least one of the below "Test Your Knowledge" questions and post a 200 to 300 words substantive comment. Please respond to one of your peer's discussion by posting a substantive comment. Don't forget that 30% of your grade is based upon your comment to your peer's posting.

Test Your Knowledge

Why is the GAAP concept of objective measurement paramount in understanding asset valuation?

Describe Mark-to-Market asset valuation.

Distinguish between Net Realizable Value and Replacement Cost.

What are the advantages and disadvantages to measuring asset values based on expected future profits?

How does a health care provider indicate the obligation of providing care under a managed care contract that has been paid in advance?

In a publicly traded organization, why might a company have a market value that differs from the Owners’ Equity on the balance sheet?

Peers Response:Distinguishes Net Realizable Value and replacement cost are two different methods for determining assets and how it can help the company/organization. Net realizable value is an alternative for valuation of assets. In the event that the organization hits financial hardship, by using this method a company can determine that value of all the assets in the company. If the value is enough, it may be just enough to pull the company out of the "red" keep the company a float. As a future healthcare administrator, net realizable value gives me a better understanding of the funds we have around us. The only bad part about this method is that it can only be used for one thing and that's finding value of assets, but it can not be used to determine the potential profit. If the assets within the company are ever appraised whose to say that the appraiser would my company a good estimate on each item. Depending on the demand of an item, the appraiser can price the item a little higher. But , if the items were not in demand then that would lessen the companies chance of being able to buy their way of potential foreclosure. Replacement cost is also an alternative method of determining assets. This method is the opposite of Net realizable value. Instead of finding out the value of asset in case they need to be sold. This method determines the cost to replace said items. Now, from what I have read it would be pretty hard to determine the correct replacement cost of a building.

Answer 1

In a publicly traded organization, why might a company have a market value that differs from the Owners’ Equity on the balance sheet?

Market value of any publicly traded company is derived by multiplying the shares outstanding with the market price of the stock whereas owner’s equity in balance sheet is stated at its face value (book value). The reason behind difference between the two is that in case of publicly traded organizations, people see more of earnings and growth potential before they invest and bring the share price above its book value. This would happen in case of many big companies, like Google, Facebook, Walmart etc. The investors have seen the protentional in the business model and expect the Value of the company to reach higher levels which result into aggressive buying in such stocks (Higher demand) resulting in higher prices. Whereas in some companies where investors do not have much confidence or have not seen any growth potential since last couple of years; that company’s market price would be lower than what is stated in book value. Factors affecting Market value to be lower than Stated book value would be Problems in senior management, Disclosed scams, Statutory restriction on business model etc.

Comment on peer’s response:

First of all in case of NRV method and replacement cost method, The value to be realized is based on the market conditions for NRV and used to take decision by the organization whether similar asset to be used or it needs to be replaced. The most economical decision is taken then. For eg. Some machinery needs higher maintenance these days but on the contrary replacement value has also gone way higher than the previous cost. Now one needs to compare the Net present value of the maintenance cost with the Net replacement cost (Replacement cost – NRV). And in my view, peer’s stand of saying that it would be pretty hard to find replacement cost of the building is not very right. It can easily be estimated with the chalked out plan of how new building needs to look like.