Question

Add redundant assets and subtract redundant liabilities

Redundant assets are tangible and intangible assets that are not required by the business to generate operating cash flows. The net realizable value of redundant assets is added to the value of the company under income-based valuation approaches.

Redundant liabilities may be directly related to redundant assets, or they may simply be liabilities not associated with the operations of the business. Redundant assets and liabilities are normally identified via a detailed review of the balance sheet of the business.

a) Add the net realizable value of redundant assets.
b) Subtract the net realizable value of redundant assets.
c) Add redundant liabilities.
d) Subtract redundant liabilities.

Answer 1

In income-based valuation of a company, adjust value by adding net realizable value of redundant assets and subtracting redundant liabilities. A T-account helps illustrate how total assets must equal the sum of liabilities plus net worth or bank capital for the firm to be in balance.

Step-by-step explanation:

When valuing a company using income-based valuation approaches, it is necessary to adjust for items that do not contribute to the operating cash flows. Redundant assets, both tangible and intangible, that are not required in the business operations should be added to the company's value. This involves calculating the net realizable value of these assets, which is the estimated selling price in the ordinary course of business, minus any costs expected to be incurred in selling or disposing of the asset. On the other hand, redundant liabilities should be subtracted from the company's value. These can be liabilities that are tied to redundant assets or those simply not associated with the operations of the business.

The correct steps to take, when adjusting the value of a company for redundant items, would be:

• Add the net realizable value of redundant assets.
• Subtract the net realizable value of redundant liabilities.

A T-account is a visual representation that separates the assets of a firm, on the left, from its liabilities and net worth or bank capital, on the right. The total assets of a firm must always equal the sum of its liabilities and net worth for the T-account to be balanced.