The president of a carpet cleaning company has returned from an executive manage

Question

The president of a carpet cleaning company has returned from an executive management seminar.  He sees you in the office coffee lounge and says "As I read and hear more and more on valuing assets, I am increasingly bewildered by the 'language of accounting.'  Yes, I understand historical cost and its problems, but, you accountants also mix and match terms like market value, replacement value, economic value, present value, opportunity value, disposal value, entry value and more values!  You seem to have extra time since I see you here in the lounge a lot.  Maybe you could help clear up this confusion for me by writing a memo tht lays out how these terms can help us to make decisions about divisional performance and about keeping or selling these assets and to inform our shareholders about our performance."

Respond to the presidents request and write such a memo.

Explanation / Answer

Date      : August 9,2013

To          : Shareholders of XYZ co.

Subject : clarification of accounting terminology

Some business associates often get confuse between accounting terms . So here is a clarification of closely related accounting terms with subtle differences :

Market value is the price at which an asset would trade in a competitive auction setting. Market value is often used interchangeably with open market value, fair value or fair market value, although these terms have distinct definitions in different standards, and may differ in some circumstances.

The term replacement cost or replacement value refers to the amount that an entity would have to pay to replace an asset at the present time, according to its current worth.

Economic value is a measure of the benefit that an economic actor can gain from either a good or service. It is generally measured relative to units of currency, and the interpretation is therefore "what is the maximum amount of money a specific actor is willing and able to pay for the good or service"?

Present value, also known as present discounted value, is a future amount of money that has been discounted to reflect its current value, as if it existed today. The present value is always less than or equal to the future value because money has interest-earning potential, a characteristic referred to as the time value of money

The opportunity cost of a choice is the value of the best alternative forgone, in a situation in which a choice needs to be made between several mutually exclusive alternatives given limited resources.

Net realizable value (NRV) is a method of evaluating an asset's worth when held in inventory, in the field of accounting. NRV is part of the Generally Accepted Accounting Principles and International Financial Reporting Standards (IFRS) that apply to valuing inventory, so as to not overstate or understate the value of inventory goods

Book value or carrying value is the value of an asset according to its balance sheet account balance. For assets, the value is based on the original cost of the asset less anydepreciation, amortization or impairment costs made against the asset

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