current replacement cost

Examples of current replacement cost in the following topics:

• Lower of Cost or Market

  • Ending inventory is normally stated at historical cost (what was paid to obtain it), but there are times when the original cost of the ending inventory is greater than the cost of replacement.
  • The criterion for reporting this is the current market value.
  • Inventories are valued at cost, which is not in excess of current market price.
  • Cost is primarily determined by either the average cost or the first-in, first-out method.
  • The replacement cost of last-in, first-out inventories exceeds carrying value by approximately USD 169 million.

• Preparation of the Balance Sheet

  • Inventory may be the largest current asset.
  • On a balance sheet, the value of inventory is the cost required to replace it if the inventory were destroyed, lost, or damaged.
  • On a balance sheet, current assets are totaled and this total is shown as the line item called "total current assets. "
  • All fixed assets (except land) are shown on the balance sheet at original (or historic) cost, minus any depreciation.
  • It is important to remember that original cost may be more than the asset's invoice price.

• Replacement Projects

  • This replacement project can serve the purpose of replacing an expiring investment with a new, identical one, or replacing an existing investment that is producing unfavorable results with one that management believes will perform better.
  • To accomplish this, one analyzes the cash flows of the current project in relation to the expected cash flows from the replacement project .
  • The net cash flows for a project take into account revenues and costs generated by the project, along with more indirect implications, such as sunk costs, opportunity costs and depreciation costs related to the project.
  • The loss of expected future cash flows from the previous project, or opportunity cost, must also be taken into account.
  • Replacement project analysis tells a company whether the costs of a replacement project provide a suitable return on investment.

• The Cost of New Common Stock

  • The cost of new common stock is determined by adding flotation costs to the cost of current equity.
  • The current price of the stock is $100.
  • We can calculate the cost of new common stock using the dividend growth model by simply devaluing the price of current common stock by the amount of flotation costs.
  • Cost of new equity equals dividends payed in year one divided by the current stock price, devalued by the amount of flotation cost, plus the growth rate.
  • Current price of $100.

• Current Obligations Expected to Be Refinanced

  • Per FASB 6, current obligations that an enterprise intends and is able to refinance with long term debt have different reporting requirements.
  • Refinancing may refer to the replacement of an existing debt obligation with a debt obligation under different terms.
  • If the replacement of debt occurs under financial distress, refinancing might be referred to as debt restructuring.
  • Calculating the up-front, ongoing, and potentially variable transaction costs of refinancing is an important part of the decision on whether or not to refinance.
  • Refinanced debt must be finalized and the new loan terms approved before reporting it and replacing it for the old debt in the liability section.

• Average Cost Method

  • Each time, purchase costs are added to Beginning Inventory Cost to get Cost of Current Inventory.
  • Similarly, the number of units bought is added to Beginning Inventory to get Current Goods Available for Sale.
  • After each purchase, Cost of Current Inventory is divided by Current Goods Available for Sale to get Current Cost per Unit on Goods.
  • The Current Goods Available for Sale is deducted by the amount of goods sold (COGS), and the Cost of Current Inventory is deducted by the amount of goods sold times the latest (before this sale) Current Cost per Unit on Goods.
  • The current cost per unit is $\frac{$5000}{200\text{ units}}=$25$.

• Inventory Techniques

  • There are two commonly used average cost methods: Simple weighted average cost method and moving average cost method.
  • Each time, purchase costs are added to beginning inventory cost to get Cost of Current Inventory.
  • Similarly, the number of units bought is added to beginning inventory to get Current Goods Available for Sale.
  • After each purchase, Cost of Current Inventory is divided by Current Goods Available for Sale to get Current Cost per Unit on Goods.
  • The Current Goods Available for Sale is deducted by the amount of goods sold, and the Cost of Current Inventory is deducted by the amount of goods sold times the latest (before this sale) Current Cost per Unit on Goods.

• Introduction to GAAP

  • The AICPA first created the Committee on Accounting Procedure in 1939, and replaced it with the Accounting Principles Board in 1951.
  • Historical Cost Principle: requires companies to account and report based on acquisition costs rather than fair market value for most assets and liabilities.
  • Only if no connection with revenue can be established, cost may be charged as expenses to the current period (e.g. office salaries and other administrative expenses).
  • Please note: Historical cost and the matching principle are slowly disappearing, having been replaced by FASB No. 157 which requires companies to classify assets based on fair value.
  • Cost-Benefit Relationship: the company considers the costs necessary to prepare the information and what benefit users will get from it.

• Discounted Dividend vs. Corporate Valuation

  • There is no reason to use a calculation of next year's dividend using the current dividend and the growth rate, when management commonly disclose the future year's dividend, and websites post it.
  • Consider the company's cost of equity capital as a proxy for the investor's required total return.
  • a) The presumption of a steady and perpetual growth rate less than the cost of capital may not be reasonable.
  • b) If the stock does not currently pay a dividend, like many growth stocks, more general versions of the discounted dividend model must be used to value the stock.
  • One common technique is to assume that the Miller-Modigliani hypothesis of dividend irrelevance is true and, therefore, replace the stocks's dividend D with E earnings per share.

• Selected Financial Ratios and Analyses

  • Vertical analysis performed on an income statement is especially helpful in analyzing the relationships between revenue and expense items, such as the percentage of cost of goods sold to sales.
  • Financial ratios may be used by managers within a firm, by current and potential shareholders (owners), and by a firm's creditors.
  • The quality of income ratio has a tendency to exceed 100% because depreciation expense decreases net income and cash outflows to replace operating assets (part of cash flow from investing activities) is not subtracted when calculating the numerator.
  • The current ratio is used to determine a company's liquidity, or its ability to meet its short term obligations.
  • When comparing two companies, in theory, the entity with the higher current ratio is more liquid than the other.