Items on a financial statement can be measured using a variety of different methods, described below. Throughout the learning material, we will review when to use each specific measurement basis. Oftentimes the measurement basis is based on the accounting framework the organization chooses to use. For now, we have provided a brief summary of each different measurement basis.
Historical Cost is the price initially paid for the item
Current Cost is the replacement value of the item, if bought today.
Net Realizable Value is the amount that could be obtained from selling the asset. Note that Net Realizable Value deducts selling expenses from the cost.
Proceeds from Sale - Selling Expenses = Net Realizable Value
Present Value: is the recovery amount of the asset. This measure represents how much the asset is worth to the company, at present. Because accounting aims to be conservative, the Present Value always uses the lesser of two amounts:
Fair Value less Cost to Sell: Fair value is the estimated market value of the asset.
or
Value in Use: Present value (PV) of estimated future cash flows generated from the asset. We will review how to calculate PV in a later article.
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