The realizable value refers to the estimated amount of money a company receives from the sale of its assets. Typically, businesses use it during liquidation, to assess the feasible return from discontinuing an operation, or while declaring bankruptcy. This value is also useful when preparing financial reports. Realizable value may be less than the asset’s initial cost due to factors such as market conditions, depreciation, or obsolescence.
Related Questions
1. What is the difference between book value and realizable value?
Book value pertains to the recorded cost of an asset, minus depreciation, in the company’s balance sheet. Realizable value, on the other hand, refers to the expected amount from asset sales, which may be lower or higher than the book value.
2. How is realizable value calculated?
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Realizable value is calculated by estimating the present market value of the assets. Deductions such as transaction fees, selling expenses, or write-offs might apply before arriving at the final value.
3. When might a company’s realizable value be relevant?
A company’s realizable value is relevant during liquidations, when selling assets, or when experiencing bankruptcy. It is crucial in financial planning and reporting, providing insights on asset utilization and potential cash inflow.
4. Can the realizable value be higher than the book value?
Yes, the realizable value can be higher than the book value. If an asset’s market values increase over time, the sales fetched may exceed the recorded book value.
5. How does the realizable value affect a company’s financial state?
The realizable value impacts a company’s financial state significantly. Higher realizable values can result in more cash flow, contributing to improved liquidity. Conversely, lower realizable values may suggest unprofitable assets or issues in overall asset management.