Summary: Blok 2 Tekst 5.2 International Financial Reporting And Analysis

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• 4 Economic valuation concepts

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• How to show capital schematically?

  W1 + P - D = W2.
  

  W1 is the opening wealth (net assets of the business) and W2 is the closing net assets. P is the profit for the period and D is the (net) drawings. 

  Opening capital plus profit minus drawings equals closing capital.

• There are four main evaluation approaches for assets

  1. historic cost
  2. replacement cost
  3. net realisable value
  4. net present value or economic value

• Edwards and Bell (1961) consider three asset dimensions when giving a value to an asset. 

  1. the form (and place) of the thing being valued
  2. the date of the price used in valuation
  3. the market from which the price is obtained

• The form can be of three types.

  1. the asset could be described and valued in its present form (frame of a chair)
  2. it could be described and valued in terms of the list of inputs (initial form)
  3. it could be described and valued as the expected outcome, less the additional inputs necessary to reach that stage (ultimate form)

• There are two basic types of market

  1. the market in which the firm could buy the asset in its specified form at the specified form at the specified time, giving entry prices.
  2. the market in which the firm could sell the asset in its specified form at the specified time, giving exit prices.

• What is money income according to Fisher (1930)?

  All money received and readily available and intended to be used for spending is money income.

• There are three successive stages, or aspects, of a person's income according to Fisher.

  1. enjoyment or psychic income, consisting of agreeable sensations and experiences.
  2. real income 'measured' by the cost of living
  3. money income, consisting of the money received by someone for meeting their costs of living

• 5 Current entry value

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• Edwards and Bell (1961) referred to the reported results under a Replacement Cost system as business income, which they defined as follows:

  Business income =

  Operating profit + realised holding gains recognised in the period + unrealised holding gains recognised in the period

• Edwards and Bell suggested two different concepts of current entry value.

  1. Present cost - the cost currently of acquiring the asset being valued
  2. Current cost - the cost currently of acquiring the inputs which the firm used to produce the asset being valued

• 6 Current exit value and mixed values

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• Edwards and Bell suggested two current exit value concepts as worthy of consideration

  1. current values

  2. opportunity costs