Definition
Exit Value refers to the net realizable value of an asset, which is its market price at the balance sheet date minus the selling expenses involved. It represents what a business could expect to receive from selling an asset in the current market conditions. Essentially, exit values are break-up values, which assume that the business may not continue operating, in contrast to the going-concern concept that assumes ongoing business operations.
Examples
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Real Estate: If a company holds a piece of real estate that has a market price of $1,000,000 and the selling expenses are estimated to be $50,000, the exit value would be $950,000.
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Inventory: For inventory items, if a firm has a stock that could be sold for $20,000 and the associated selling expenses (e.g., shipping and handling) amount to $2,000, the exit value of the inventory would be $18,000.
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Machinery: A company may own machinery with a market value of $200,000. If the costs for dismantling, shipping, and selling the machinery are $20,000, the exit value of the machinery would be $180,000.
Frequently Asked Questions
What is the key difference between exit value and entry value?
Exit value is the anticipated net amount a company could receive from selling an asset, while entry value is the cost paid to acquire an asset. Exit value focuses on the potential sale proceeds; entry value is concerned with the purchase price.
How is the exit value related to the going-concern concept?
Exit values assume the need to liquidate assets, more aligned with the break-up value notion, whereas the going-concern concept is based on the premise that a business will continue its operations indefinitely, thus not requiring an assessment of liquidation values.
Why is the exit value important in financial reporting?
Exit value provides a realistic approximation of the cash that can be recovered by selling an asset. This information is crucial for stakeholders to understand the liquidity and financial stability of a company, especially in distress situations.
Can exit values be used for all types of assets?
Yes, exit values can be applied to a wide range of assets including real estate, inventory, machinery, and financial securities. However, the specific calculation methods and valuation may vary by asset type.
Related Terms
- Net Realizable Value (NRV): The estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated costs necessary to make the sale.
- Break-Up Values: The value that can be realized if the business is broken up and its assets sold individually, rather than continuing to trade as a going concern.
- Going-Concern Concept: An accounting principle that assumes a business will continue its operations into the foreseeable future and therefore assets are valued at cost rather than liquidation values.
- Entry Value: The price paid to acquire an asset, representing its historical cost at the time of purchase, differing from the realizable exit value.
Online References
- Financial Accounting Standards Board (FASB)
- International Financial Reporting Standards (IFRS)
- Investopedia: Exit Value
- AccountingTools: Net Realizable Value
Suggested Books for Further Studies
- “Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield
- A comprehensive textbook providing in-depth coverage on financial accounting, including concepts of asset valuation, exit values, and NRV.
- “Principles of Accounting” by Belverd E. Needles, Marian Powers, and Susan V. Crosson
- This book introduces core accounting principles and practices, including detailed discussions on the going-concern concept and asset liquidation values.
- “Financial Reporting and Analysis” by Charles H. Gibson
- Offers insights into financial statement analysis and reporting, emphasizing the importance of accurate valuations and disclosures.
- “Accounting for Value” by Stephen Penman
- Discusses the connection between accounting practices and valuation, providing strategies to assess the true worth of assets and liabilities in a business context.
Accounting Basics: “Exit Value” Fundamentals Quiz
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