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Valuation and how to apply valuation methods

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What is valuation? How would you apply valuation methods? Why is valuation an important tool in risk management? Explain.

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Hello. I provide the following to assist you.

What is valuation?
The process of estimating a potential market value of an asset.

"The premise of valuation is that we can make reasonable estimates of value for most assets, and that the same fundamental principles determine the values of all types of assets, real as well as financial. Some assets are easier to value than others, the details of valuation vary from asset to asset, and the uncertainty associated with value estimates is different for different assets, but the core principles remain the same. This introduction lays out some general insights about the valuation process and outlines the role that valuation plays in portfolio management, acquisition analysis and in corporate finance. It also examines the three basic approaches that can be used to value an asset."

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This solution provides a detailed explanation of valuation, how to apply valuation methods, and why valuation is an important tool in risk management.

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Inventory valuation methods: GAAP

1. Are there any other inventory valuation methods acceptable under GAAP besides LIFO, FIFO, average cost and specific identification? If so, when is it appropriate to use the other method(s)? (Provide the Codification reference for your answer)

2. What does the Codification say about consistency regarding the application of the chosen inventory valuation method? (Provide the Codification reference for your answer)

3. If the company were to choose one inventory valuation method in the current year, and then decide in the following year to change inventory valuation methods to a method that better approximates the company's actual costs: (Provide the Codification references for your answers)

a. Would this be accounted for as a change in accounting estimate or a change in accounting principle?

b. Where is the Example provided in the Codification that illustrates the guidance for the retrospective application of a change from LIFO to FIFO (assuming it is practicable to determine the cumulative effect of the change for all prior years)?

4. As New Beginnings is a start-up company, it is still determining how much inventory to manufacture and through the budgeting process it has been determined that over- or under-producing inventory relative to demand will have a significant negative impact on the company's net income. As such, New Beginnings has entered into an agreement with Mature Corporation whereby each manufacturer will buy and sell inventory from the other on an as-needed basis at market prices. The agreement is not predicated on the understanding that the companies will purchase certain quantities from one another (i.e., there is no requirement that Mature Corporation will purchase from New Beginnings at all, or vice versa). All transactions that do occur will be gross-cash settled at market prices. (Provide the Codification references for your answers)

a. Based on this information, how would New Beginnings account for these purchases and sales of inventory with the same counterparty: As a single exchange between counterparties or as separate monetary transactions?

b. Where is an Example of this type of transaction provided in the Codification?

5. Based on the criteria in the Codification (include references), explain why each of the following items would or would not be included in Inventory Cost.

a. Expenses incurred for marketing to sell New Beginnings' inventory

b. General & administrative expenses incurred by New Beginnings that are not clearly related to production

c. Freight charges paid by New Beginnings to its suppliers for inventory items purchased

d. Shipping & handling costs incurred on the sale of inventory from New Beginnings to a customer

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