Valuation Methods: Historical Cost, Lower of Cost Market

Valuation Methods
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January 28, 2017
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1 Historical Cost is a kind of measure utilized in the field of accountancy that evaluates an asset’s value based on its original cost when it was first purchased/acquired by the company/individual (Investopedia.com, n.d.). For example, if the company if purchased a building as its main production site in the year 2014 for $400,000, given that this company utilized historical costs in its financial statements, then the balance sheet on this asset would still reflect $400,000 despite any changes in is present value after all the years that they’ve been using it.
2 Lower-of-cost-or-market is usually utilized by companies in order to include any “deteriorations/declines” in assessing an asset's value. This is done by recording an asset’s value depending on which has a lower cost between the current market price and its original price (AccountingTools.com, n.d.). This type of the assessment is usually reflected in assets that have become phased-out, obsolete, and/or depreciated. One of the examples of this would be “Computer sets” used in the office. Let’s say that the original cost per set is $350 and the current market price is $250, the balance sheet would reflect $250 given that it utilizes the Lower-of-cost-or-market assessment (AccountingTools.com, n.d.).
3 Depreciated book value refers to the assessment of an asset based on its original cost price and its “depreciation structure” which is reflected on the company’s financial statement. This depreciation structure is usually given enough space for the “regular and consistent” manner of allowing such reduction in its costs (USlegal.com, n.d.). For example, a machinery acquired by the company originally cost $350,000, using depreciated book value in assessing its present cost would mean that every annum/quarter, its actual costs would follow a structure that is characterized by a reduction in its cost, as reflected in the balance sheet (USlegal.com, n.d.). Thus, given that every year the machinery would lose $42,000 from its original worth, then after its first year of acquisition, its value would go down to $41,000, down to $40,000 the next, and so on and so forth
4 Amortized Book Value refers to the value of an asset based on its “distributed cost” during acquisition (Boundless.com, n.d.). This distribution usually happens when an intangible asset is sold to the public for the hopes that its value would actually go up during a given period. For example, if an animation company copyrighted its movie for $30,000, and a company bought 10% of the shares/cost for $300 in exchange for a premium, then the “Amortized book value” would reflect $299,700 in its balan...