ssssBook Value
Book value is the net asset value, the
remaining benefit the asset will provide. The
book value is an asset's historical cost less
any depreciation and impairment costs.
For Example:
Suppose we buy a car for 1 million rupees,
car value is depreciated by 1 lakh each year,
after 5 years the book value of the is 5 lakhs.
Historical Cost
Historical cost is when a transaction is done
or an asset is acquired. Depreciation is
always getting calculated on the historical
cost.
For Example:
Suppose we buy a car for 1 million rupees,
car After 5 years the car historical cost
remains 1 million.
Fair Market Value (FMV)
The fair value of an asset is the amount of
money you would get if you sold the good in
the current market or you would pay if you
bought the good in the current market.
For Example:
Suppose we a buy a machine for $100,
shipping cost of machine is $100 and
commission charges are $10, the Fair market
value of the Machine is S100.
Net Realizable Value (NRV)
The Net Realizable Value or NRV is the value
of an asset that a seller expects to get less
the cost or expenses in selling or disposing of
the asset.
NRV= Expected Selling Price - All Selling Costs
For Example:
Suppose we a buy a machine for $100,
shipping cost of machine is $20 and
commission charges are $10, the NRV of the
Machine is:
NRV= $100-$20-$10 = $70
NAV
"Net asset value," or "NAV," of an investment
company is the company's total assets minus
its total liabilities.
For example:
If an investment company has securities and
other assets worth $100 million and has
liabilities of $10 million, the investment
company's NAV will be $90 million.
Acquisition Cost
Acquisition cost refers to the all-in cost to
purchase an asset after adjusting for
discounts, incentives, closing costs and other
necessary expenditures, but before sales
taxes.
For Example:
Suppose we a buy a machine for $100,
shipping cost of machine is $20, commission
charges are $10, and installation charges is
$5, so the Acquisition cost of the Machine is
$130.
GOODWILL
Goodwill arises when one company is purchased by another company. If the purchase price is
greater fair value at acquisition then goodwill is created in the acquirer’s balance sheet.
Goodwill is subject to impairment
Example:
Company A buys company T for 100 million. Book value of the company T’s asset and liabilities:
125 million and 75 million. Fair value of company T’s assets and liabilities: 160 million and 75
million. What is the goodwill?
Data:
Buying Price of Company T = 100 Million
Book Value of Company T Assets = 125 Million
Book Value of Company T Liabilities = 75 million
Fair Value of Company T Assets = 160 Million
Fair Value of Company T Liabilities = 75 million
Goodwill =?
Solution:
Company T selling price = (Fair value of company T assets) – (Fair Value of Company T Liabilities)
Company T selling price = 160 million – 75 million = 85 million
But the company A buys company T for 100 million, Pays 15 million (100 million – 85 million)
extra.
These extra “15 million” Company A pays as a Goodwill for Company T.
Held to Maturity:
→ Held-to-maturity (HTM) securities are purchased to be owned until maturity.
→ Bonds and other debt securities, such as certificates of deposit (CDs) are the most
common form of held-to-maturity (HTM) investments.
Held for Trade:
→ A held-for-trading security is a debt or equity investment purchased with the intention
of short-term gain.
→ On the balance sheet, held-for-trading securities are considered current assets.
→ Held-for-trading securities are reported at fair value, and unrealized/gains or losses are
reflected in earnings.
Available for Sale:
→ Available-for-sale securities (AFS) are debt or equity securities purchased with the intent
of selling before they reach maturity.
→ Available-for-sale securities are reported at fair value.
→ Unrealized gains and losses are included in accumulated other comprehensive income
within the equity section of the balance sheet.
Two types of Gains:
Realize Gain or Income
A realized gain results from selling an asset at
a price higher than the original purchase
price. It occurs when an asset is sold at a
level that exceeds its book value cost.
Unrealized Gain or Income
An unrealized gain is an increase in the value
of an asset or investment that an investor
holds but has not yet sold for cash, such as an
open stock position.