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Sir when a question asks for replacement basis method
And for example the question provides that only 80% of receivables are realisable
Then do we take full 100% receivables or only 80% for replacement basis method??I had another doubt about a question in kaplan text which stated that the company was going concern( hence realisable value cannot be used)and it was given that out of 50000 of inventory only 5000 scrap was realisable…since realisable value method cannot be used then why did they used 5000 …they should have used the book value of 50000?
If the value of receivables is 4.5 and the net asset value is based on a liquidation basis and it tells you that receivables are only expected at 80% value. Then it’s only 3.6 (80%) you put through as a value.
Can you tell me what question this is please? Or where it is?
By the sound of it if the question states that the company is a going concern, which means that the realisable value method cannot be used.
If it mentioned that out of the $50,000 worth of inventory, only $5,000 is scrap and can be realised.
In this case, the $5,000 represents the portion of the inventory that can be realised, and it is not necessary to use the book value of $50,000.
What you have written does not provide any further information to suggest using the book value.
sir i just wanted to know that when we use the replacement value for calculating the value of company, do take into account the realizable value, like the information that the trade receivables are only 80% realizable or inventory have only scrap proceeds of $5000, or not?…and if we take please explain why
As I have answered above and say it again…
In the replacement basis method, if it states that only 80% of receivables are realisable. Therefore, you would consider only 80% of the receivables when applying the replacement basis method.
If it mentioned that out of the $50,000 worth of inventory, only $5,000 is scrap and can be realised.
Then the $5,000 represents the portion of the inventory that can be realised.So the replacement method calculates the cost of replacing the business’s assets, which may
be relevant if the assets are going to be used on an on-going basis, or if the bidder wants to estimate the minimum price that would have to be paid to buy the assets and set up a similar business from scratch.But sir that 80% or 5000 will be realisable value rather than cost of replacing them
I have answered your questions above
Why again are you so determined to prove a point!!!You are only asking me questions that were set over 10 years ago the question asked for a value using net asset value (liquidation basis)
Can we move on please!
NRV are at the best price obtainable.
Net realisable values of the assets less liabilities.
This amount would represent what should be left for shareholders if the assets were sold off and the liabilities settled. However, if the business being sold is successful, then shareholders would expect to receive more than the net realisable value of the net assets because successful businesses are more than the sum of their net tangible assets: they have intangible assets such as goodwill, knowhow, brands and customer lists – none of which is likely to be reflected in the net realisable value of the assets less liabilities. Net realisable value therefore represents a ‘worst case’ scenario because, presumably, selling off the tangible assets would always be available as an option. The selling shareholders should therefore not accept less than the net realisable amount – but should usually hope for more.Replacement if used on an on-going basis therefore estimate the minimum price to pay to buy assets
Replacement values so once again, not of great practical benefit. The approach tries to determine what it would cost to set up the business if it were being started now. The value of a successful business using replacement values is likely to be lower than its true value unless an estimate is made for the value of goodwill and other intangible assets, such as brands. Furthermore, estimating the replacement cost of a variety of assets of different ages can be difficult.When all said and done net realisable value is likely to be the most useful because it presents the sellers with the lowest value they should accept.
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