ASSETS VALUATION AND ITS EFFECT ON THE FINANCIAL STATEMENTS OF A MANUFACTURING COMPANY (A CASE STUDY OF NIGERIAN BOTTLING COMPANY PLC, LOKOJA BRANCH OFFICE)

ASSETS VALUATION AND ITS EFFECT ON THE FINANCIAL STATEMENTS OF A MANUFACTURING COMPANY

(A CASE STUDY OF NIGERIAN BOTTLING COMPANY PLC, LOKOJA BRANCH OFFICE)

EDI MAINAJI JOYCE: 2012/HND/ACCT/008

A PROJECT SUBMITTED TO DEPARTMENT OF ACCOUNTANCY, SCHOOL OF MANAGEMENT STUDIES KOGI STATE POLYTECHNIC, LOKOJA, KOGI STATE

IN PARTIAL FUFILMENT OF THE REQUIREMENT FOR THE AWARD OF HIGHER NATIONAL DIPLOMA (HND) IN ACCOUNTANCY, SCHOOL OF MANAGEMENT STUDIES KOGI STATE POLYTECHNIC, LOKOJA, KOGI STATE

OCTOBER, 2013

APPROVAL PAGE

This project work has been read and approved having satisfied the condition for the Award of Higher National Diploma (HND) of the Department of Accountancy, Kogi State Polytechnic Lokoja.

___________________ ______________

Head of Department Date

Mrs R. A. Haruna

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Project Supervisor Date

Mrs R. A. Haruna

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External Moderator Date

DEDICATION

This project is dedicated to God Almighty, the maker of heaven and earth who gave me the grace to write this research work successfully.

ACKNOLEDGEMENT

I wish to acknowledge the ever faithful, gracious and merciful God who has made this project work a success.

My profound gratitude goes to my project supervisor, Mrs. R. A. Haruna no amount of words can amply capture the depth of my admiration and commendation. Through your motherly guidance, you have set a pace that your colleagues elsewhere would like to emulate.

I acknowledge with gratitude Mrs R. A. Haruna my head of department for his patience and guidance throughout this exercise.

I equally extend my appreciation to Mr. Ehindero, M.J for his constructive critism and guidance throughout this research work.

ABSTRACT

Over the years, bodies of principles have evolved to regulate the practice of asset valuation so that the preparation and presentation of financial statements are guided by consistent, comparable and objective principles. This calls for professional and statutory stipulations on assets valuation by manufacturing companies. The researcher undertook this study to explore the need and impact of asset valuation process to management in formulating adequate and appropriate accounting policies for their organizations, using Nigerian bottling Company, plc, Lokoja branch office as a point of reference. The methodology was employed so as to analyze the observed variables obtained from the case study. In the final analysis, it became imperative and necessary to make recommendations to companies on area where improvement should be effected in order to enhance the purpose for which the financial statements was designed.

TABLE OF CONTENT

Title Page i

Approval Page ii

Dedication iii

Acknowledgement iv

Abstract v

Table of Content vi

CHAPTER ONE: INTRODUCTION

1.1 Background of the study 1

1.2 Statement of the problem 1

1.3 Significance of the study 2

1.4 Purpose of the study 2

1.5 Research Hypothesis 3

1.6 Scope of the study 4

1.7 Limitation of the Study 4

1.8 Definition of key concepts 4 - 5

1.9 Organization of the study 5 - 6

CHAPTER TWO: REVIEW OF LITERATURE

2.1 An Overview of Assets valuation 7 - 8

2.2 Types of Assets 8 - 13

2.3 Methods of Asset Valuation 13 - 16

2.4 Models of Financial Assets Valuation 17

2.5 Impact of Valuation at fair value 18

2.6 Asset Measurement and valuation 18 - 22

2.7 Problems of assets valuation 22 - 24

2.8 Historical Background of NBC plc 24

CHAPTER THREE: RESEARCH METHODOLOGY

3.1 Research Design 25

3.2 Area of the Study 25

3.3 Population of the Study 25

3.4 Sample of the Study 26

3.5 Methods of Data Collection 26

3.6 Description of Instruments 26

3.7 Administration and Retrieval of Instruments 27

3.8 Method of Data Analysis 27

CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS

4.1 Presentation of Data 28

4.2 Analysis of Data 28 – 35

4.3 Test of Hypothesis 35 - 37

4.3 Discussion of Findings 38

CHAPTER FIVE: SUMMARY, COONCLUSION AND RECOMMENDATIONS

5.1 Summary 39

5.2 Conclusion 39

5.3 Recommendations 40

Bibliography 41

Appendix i 42

Appendix ii 43 - 44

Appendix iii 45

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

It is no exaggeration to conclude that the major challenges facing most Nigerian manufacturing firms in this decade are valuation process of business assets, financial competition, etc.

In today’s environment, financial statements are receiving unprecedented scrutiny from outside parties, mainly from both investors and the Securities and Exchange Commission; correspondingly, auditing firms are heavily scrutinizing the work of outside experts such as valuation analysts whose work impacted financial reporting.

A company needs production lines and equipment for its activities. It purchases them, values them at their acquisition costs, and gradually writes off this acquisition cost against expenses. The carrying value of these assets is gradually reduced as they depreciate in use, and eventually they completely lose their value.

But obviously today, many manufacturing firms reports negative equity, but if its assets had been valued at their fair value, its equity would have been higher.

However, it is in this view that this research work is carried out in order to encourage the management of manufacturing firms of today to effectively value their assets at fair value.

By this, they will be able to revalue their assets at a fair value.

1.2 STATEMENT OF THE PROBLEM

Some assets are easier to value than the others, the details of valuation vary from asset to asset, and the uncertainty associated with value estimates is different for different assets.

However, owners of businesses are required by the statutory bodies to submit the financial statements of their businesses, despite the core accounting principles and concepts guiding the recording of assets, accountants yet come across situations where two or more guiding concepts or principles are in conflict and one overrides the application of the other.

The problems are how to revalue assets to their higher fair value, and appropriate asset valuation process that will satisfy the needs and taste of management and other stakeholders.

1.3 SIGNIFICANCE OF THE STUDY

The significance of this research work is to show how to value assets effectively to their higher fair value.

This study is design to show the benefits that lie to any manufacturing company which effectively carried out assets valuation and know its worth before preparing its financial statement.

Furthermore, this study will help the borrowers and lenders of various manufacturing firms in their operations and investment decisions. It will also help the students who may likely want to carry out further research in this area of study.

1.4 PURPOSE OF THE STUDY

The general purpose of this research work is to examine the asset valuation on financial statement of an organization over the period of five (5) years from 2008 – 2013 with special reference to Nigerian Bottling Company (NBC) plc, Lokoja branch office.

However, this study also examines the following specific purposes;

To analyze the accounting policies on assets valuation with emphasis on the various methods of valuing them in NBC plc, Lokoja branch office.

To appraise the situations where two or more of these relevant valuation concepts are in conflict, and one overrides the application of the other.

To suggest appropriate and adequate measures for selecting and applying valuation methods, it will also determine the extent to which the provision of CAMA (1990) as amended and statement of accounting standards (SAS) regarding assets valuation over a period of five (5) years.

To examine and identify the continuous and undergoing chances in assets valuation methods used at NBC plc Lokoja branch office, with a view to meeting the needs of emerging and changing financial situations.

To make appropriate recommendations for management, in selecting and applying valuation concepts.

Finally, to determine the effects of assets valuation on preparation and presentation of financial statements to the end users with a particular reference to Nigerian Bottling Company plc, Lokoja branch office.

1.5 RESEARCH HYPOTHESIS

H1: The preparation and presentation of financial statement depend on the method of assets valuation, as the basis of reporting accounting information to the end users.

H0: The preparation and presentation of financial statement did not depend on the method of assets valuation, as the basis of reporting accounting information to the end users.

H1: NBC comply with the statutory requirement that is in company and allied matters act (CAMA) 1990 and Statement of accounting standards (SAS) 1 and 4 on asset Valuation.

H0: NBC is not complying with the statutory requirement that is in company and allied matters act (CAMA) 1990 and Statement of accounting standards (SAS) 1 and 4 on asset Valuation.

1.6 SCOPE OF THE STUDY

The research undertakes an overview of the assets valuation and its effect on the financial statement of a manufacturing company in relating to the Nigerian Bottling Company plc, Lokoja branch office.

The scope of the project covered all the historical cost and current cost of engaging in assets valuation and the various ways of assets valuations.

These methods are to ensure compliance with statutory requirements as it related to assets and their valuation.

Whether all these manufacturing plants examined under NBC plc, use historical cost or current cost methods in valuing their assets. All these are to ensure compliance with statutory requirements as it related to assets and their valuation.

1.7 LIMITATIONS OF THE STUDY

In the course of carrying out this research work, the researcher encountered some limitations. The limitations include:

Capital and poor finance: the research work requires much money to be spent on transportation, administration and preparation of questionnaire among other expenses. And the researcher is faced with problem of low capital and thus could not go beyond the scope actually covered by this study.

Another limitation encountered by the researcher, is the respondents did not give their full attention when interviewed secretly, and this factor limit the scope of this study.

Lastly, low response rate of the respondents is another factor that limits the scope of this research work.

1.8 DEFINITION OF TERMS

In the course of this study, many terms and concepts will be encountered especially by users of this project work. Therefore, for easy comprehension and understanding, the researcher has taken the pain to define some of the key concepts and terms.

ASSETS: These are properties, economic resources or valuable possessions owned by an organization or business entity.

VALUATION: This is the professional judgment about how much money something is worth.

CAPITAL: This is the properties fund net worth of a business.

FIXED ASSETS: These are assets acquired permanently by the company for the purpose of creating production capacity e.g plant and machinery, land and buildings, fixture and fittings, furniture and equipments, etc.

CURRENT ASSETS: These are assets such as cash, debtors, stocks, bills receivables, etc that can be easily realized.

EQUIPMENT: These are things that are needed for a particular purpose or activity.

STOCK: this is the value of shares in a company that have been sold.

FINANCIAL STATEMENT: This is the statement that shows the profit and loss account, balance sheet, director’s fees, auditor’s fees, solicitor’s fees, cash inflow and outflow, etc which are calculated at the end of a financial year.

1.9 ORGANIZATION OF THE STUDY

This research work is divided into five chapters as follows;

Chapter one covers the background of the study, statement of the problem, purpose of the study, significance of the study, research hypothesis, scope and limitation of the study, definition of key concepts and finally organization of the study.

Chapter two review relevant literatures about the topic, while chapter three contains the research methodology (i.e. how data are collected, used and the problems involved)

Chapter four gives a comprehensive analysis of the data, while the last chapter contains the summary, conclusion and recommendations

CHAPTER TWO

REVIEW OF RELATED LITERATURE

2.1 AN OVERVIEW OF ASSETS VALUATION

According to Wikipedia, (2013) Valuation is a process of estimating what something is worth. Items that are usually valued are financial asset or liability.

Valuation can be done on assets (for example, investment in marketable securities such as stocks, options business enterprise or intangible assets such as patents and trademarks) or on liabilities (example bonds issued by a company). Valuation is needed for many reasons such as investment analysis, capital budgeting, merger and acquisition transactions, financial reporting, and taxable events to determine the proper tax liability and it litigation.

According to Adamoda, (2012) Valuation is knowing what an asset is worth and what determine that value is a pre-requisite for intelligent decision making in choosing investments for a portfolio in deciding on the appropriate price to pay or receive in a takeover and in making investment, financing and dividend choices when running a business.

The premise of valuation is that we can make reasonable estimates of value for most assets, and that the same fundamental principles determine the value of all types of assets. Some assets are easier to value than others, the details of valuation vary from asset to asset, and the uncertainty associated with vale 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 basis approach that can be used to value an asset.

According to Investopedia, Asset valuation is a method of assessing the worth of a company real property, security, antique or other item of worth. Asset valuation is commonly performed prior to the sale of an asset or prior to purchasing insurance for an asset.

Asset valuation may consist of both subjective and objective measurements. Example in valuing a company, there is no number on the company’s financial statements that tells how much its brand name is worth; this aspect of asset valuation must be subjective on the other hand, net profit is an objective measurement based on the company’s income and expenses figures. Common methods for determining an asset’s value include comparing it to similar assets and evaluating its cash flow potentials. Acquisition cost, replacement cost and depreciate value are also methods of assets valuation.

From the above definition of asset valuation, I define asset valuation as a procedure in which the value of an asset is determined. This is done in order to confirm that the value is reported accurately and appropriately on the balance sheet.

2.2 TYPES OF ASSETS

Asset is a resource controlled by an entity as a result of past events and from which future economic benefits are expected to flow to the entity (IASB framework, 2012).

In a simple word, asset is something which a business own or controls to benefit from its use in some way. It may be something which directly generates revenue for the entity (example machine, inventory) or it may be something which supports the primary operations of the organization (office building). Asset may be classified into two types namely, fixed and current assets.

FIXED ASSETS

According to the acquisition and contraction of the fixed assets required in the production and distribution of goods and services obviously is important to business management and to the accounting profession.

Nwankwo,(2007) is of the opinion that fixed assets are to any individual organization, group or association like a tree. Profit and gains from its operation are like fruits. Fixed assets a tree endures for many years, while profit is derived from the tree. The financial outlay on fixed assets in most organization is excess of cost less appropriate depreciation. Fixed assets are valued at historical cost but have (relatively) frequent appreciation to current values because of the rise in land prices. Any increase in value is taken to capital reserve and it is not available for (generally) distribution.

SSAP 16 (2004) requires that the value to the business current cost must also be shown together with depreciation calculated on that figure. The followings are types of fixed assets;

Land: according to statement of accounting standard 3, issued by Nigeria accounting standard board NASB (1986), Land must be separated from other fixed costs. The incidental cost incurred in addition to the purchased price are commission to real estate brokers, legal fees for examining and ensuring the land, fees for surveying, drawing, clearing, grading and landscaping, etc.

Building: Buildings are always valued on historical cost basis. According to statement of accounting standard 3, issued by NASB (1989), building could be purchased out rightly or constructed. Also according to Harrison and Homgen, (2005), where the building is purchased, any additional cost incurred in modifying the building for the intended purpose price to arrive at the historical cost.

Motor Van: according to statement of accounting standard 3, issued by Nigeria accounting standard board NASB (1986), motor van is valued at its acquisition cost less the depreciation value.

Plant, Machinery and Equipment: According to statement of accounting standard 3, issued by Nigeria accounting standard board NASB (1986), it is valued at its acquisition cost less the depreciation. According to Harrison and Homgen, (2005) cost of plant and machinery includes the purchase price (less any discount) transportation charges, sale and other taxes purchases commission, installation cost and any expenditure incurred to test the asset before it is placed in service.

Furniture, Fixtures and Fittings: according to statement of accounting standard 3, issued by Nigeria accounting standard board NASB (1986), they are also valued at acquisition cost less depreciation. The process of determining the cost of furniture, fixtures and fittings is similar to that of plant and machinery as well as equipments.

Premises: according to statement of accounting standard 3, issued by Nigeria accounting standard board NASB (1986), premises must be separated from other fixed assets. The incidental amount incurred in addition to the purchased price is commission to real asset estate brokers, legal fees for examining and ensuring the premises.

CURRENT ASSETS

According to Oldham, (2001) current asset must normally be shown at the lower part of cost or net realizable value. The value of current asset must not be higher than acquisition cost or the market value of the asset and may be reduced where management anticipates using realizable business judgment. A decline in market price when valuing current asset, anticipated losses should be provided for an anticipated profit ignored until it is actualized. The followings are types of current assets;

Stock of Inventory: Stocks are shown at the lower part of cost and net realizable value. In the case of strategic raw materials, stock may be reduced up to 20% of cost depending on what is allowed by the income tax legislation.

Pandy (1990), stated that ‘a manufacturing company will have substantially high level of all kinds of stocks (inventories) stock of inventory includes the products of a company meant for sales and the components that make up the products. The basis of valuing stock is not normally disclosed. Onaleye, (2008) said that with a consistent application of stock, it is hoped that distortion in stocks and work-in-progress will be evened out.

Stocks: these are production input and they exist in three forms namely;

Raw Materials: These are materials to be converted into products, which have sale values.

Work-in-progress: This is very common in manufacturing companies. It is a new material partly worked on. Igben, (2010) clearly stated that work-in-progress are shown at the lower part of cost and net realizable value. A cost is made up of labour and material plus appropriate proportion of factory overheads.

Finished Goods: These are goods that through the manufacturing process have been completed and it is ready for sale.

Debtors: according to statement of accounting standard 3, issued by Nigeria accounting standard board NASB (1986), the amount recorded for debtors in the trial balance is the value of group debtors. It is adjusted in the balance sheet by the provision for bad debt and doubtful debtors for proper valuation of debtors.

Cash:according to statement of accounting standard 3, issued by Nigeria accounting standard board NASB (1986), the total amount recorded in the trial balance. It is adjusted in the balance sheet when there is provision for additional cash in the business.

Bank: according to statement of accounting standard 3, issued by Nigeria accounting standard board NASB (1986), the amount of money at bank in the trial balance which is value by the figure realized from cash sales cash incremental and sales of asset. Valuation of bank is really a consideration of the adequacy of the cash at bank or capital introduced into the business.

Bill Receivable: according to statement of accounting standard 3, issued by Nigeria accounting standard board NASB (1986), the amount receivable from the customers for which the negotiable instruments in the form of bill of exchange which is received from the customers.

Prepayment: according to statement of accounting standard 3, issued by Nigeria accounting standard board NASB (1986), stated that the amount paid in advance by the customers for future investment by the investor.

Accrued Income: according to statement of accounting standard 3, issued by Nigeria accounting standard board NASB (1986), stated that the amount of money or income that is yet to be paid by customers such income is subscription in arrears and other income not yet received from the customer/clients.

2.3 METHODS OF ASSETS VALUATION

Although, conventional accounting is often called historical cost accounting, we must understand that this term meant non-monetary assets of a company. In this wise let us take note of all various methods of valuation of assets found in practice today.

Historical Cost Method

According to Nigeria accounting standards board (1986), historical cost accounting is described as a concept which holds that cost is the appropriate basis for initial accounting recognition of all assets acquisitions, services rendered or received, expenses incurred, creditors and owners interest and its values are retained throughout the accounting process.

Meggs (2007), opined that historical cost method is the amount originally paid to acquire the asset, this amount maybe very different from what we would pay today to replace it. This policy of accounting for assets valuation at their cost is often referred to as the cost principles of accounting. It is the cost or cash equivalent valued that either change bonds or become obligated when accounting event occurred.

The historical cost methods according to Nigeria accounting standard board (2006) has the following advantages

It is consistent with the fundamental accounting concepts of going prudence, consistency, etc.

It enables shareholders to assess the management in their role of “stewards” of the company’s affairs.

It is fairly objective or neutral in its measurements, because it is based on historical traditional methods. However, this objectivity is limited because judgment and bias may creep into the application of accounting policies.

Historical cost method has stood the test of time because it is practical in obtaining realizable estimates of current costs.

In some cases, specific price index may provide the most reliable source of current cost information. In other cases, where an asset which is not new has been partially depreciated, its current cost may be estimated by determining the cost to acquire a new one.

Realizable Value Method

According to statement of accounting standard 11, issued by Nigeria accounting standard board NASB (1986), this concept of valuation is based on the money value of asset if they were sold.

Thus whereas, historical cost valuation reflected typically entry values, realizable values represent typically existing values. Realization rather than the used of company asset, it is measured as the expected price at which an asset could be sold in its present condition, less all disposal cost.

This method of asset valuation is used in cases where current value cannot be determined reasonably by other approaches. Ighen (2010) stated that, this is the estimated current value which will be realized from the sales of the stock in the normal course of business after deducting the followings;

a. Estimated cost of further processing if necessary

b. Estimated selling and distribution cost

The use of realizable value methods is supported by the following arguments contained in the SSAP 16 (2004) is to serve as a supplementary method to the historical cost method using price index.

a. It is very relevant in investment decision making that is asset replacement, because it gives the current replacement cost of the assets.

b. When business is to be purchased, it gives a realistic price.

c. It corrects the effects of inflation, which is a weakness of historical cost method.

d. It recognizes dynamic nature of business as a result of variation in price level.

e. It identifies profit and losses arising from business operations separately from those arising from price level charges

f. Depreciation is calculated on the value of an asset to the business. In most cases, such value is the net current replacement cost.

Despite the above features of realizable value methods, the concept is always confronted with some limitations which make it not widely used in the preparation of financial statements according to SSAP 16 (2004).

Current Cost Method

According to Jenny, (2004), and statement of standard accounting practice (2004) issued by the accounting standard committee, the current cost is measured as a cost of replacing the asset or one with the same service potential. Estimating the current cost of some assets is hard because there may not be a current market for certain unique assets for other asset estimating current cost may be simple because there are established markets.

On the balance sheet current cost accounting method requires that asset to be reported at the amount that will have to be paid to purchase them as at the balance sheet date. The method evolved because of deficiencies in the historical cost method especially during inflation.

The current cost accounting method stated that;

a. It does not pre-empty any decision as to whether or not the enterprises should continue.

b. Economic theories of the firm portray the firm as an adaptive opportunity seeking organization. Hence a measure of its ability to switch resources and activities is relevant to users of financial reports.

c. Realizable values are the best indicator of the sacrifices made by the firm in holding assets and therefore, are the best measures of the opportunity cost involved.

2.4 MODELS OF FINANCIAL ASSETS VALUATION

According to Donald, (2012) Valuation of financial assets is done using one or more of these types of models:

ABSOLUTE VALUE MODELS This determines the present value of an asset's expected future cash flows. These kinds of models take two general forms: multi-period models such as discounted cash flow models or single-period models such as the Gordon model. These models rely on mathematics rather than price observation.

RELATIVE VALUE MODELS This determines value based on the observation of market prices of similar assets.

OPTION PRICING MODELS These are used for certain types of financial assets (e.g., warrants, put/call options, employee stock options, and investments with embedded options such as a callable bond) and are a complex present value model. The most common option pricing models are the Black–Scholes-Merton models and lattice models.

FAIR VALUE This is used in accordance with US GAAP (FAS 157), where fair value is the amount at which the asset could be bought or sold in a current transaction between willing parties, or transferred to an equivalent party, other than in a liquidation sale. This is used for assets whose carrying value is based on mark-to-market valuations; for fixed assets carried at historical cost(less accumulated depreciation), the fair value of the asset is not used.

2.5 IMPACT OF ASSET VALUATION AT FAIR VALUE

As a result of valuation at a higher fair value, the company’s equity will be increased by the amount of the difference between the previous (lower) carrying value and the new (higher) fair value, namely:

In the event of a merger, amalgamation into a separate entity, and demerger account 416, differences from revaluation in the event of a merger, amalgamation into a separate entity, and demerger is used; i.e. there is no impact on the income statement.

In the event of a contribution of a business, the contributor will increase its profit (if the fair value of the contribution has been recognized); that is, there is an impact on the income statement.

In the event of the sale of a business, the seller will increase its profit; that is, this has an impact on the income statement.

Possible temporary differences between the carrying value of assets and liabilities and their tax base are subject to deferred taxes.

This increase in the company’s equity could also be used for the payment of dividends or other forms of the share of profit. In other words, the difference between the previous (lower) carrying value and the new (higher) fair value can be distributed among shareholders/partners under certain circumstances.

2.6 ASSET MEASUREMENT AND VALUATION

When analyzing any firm, we would like to know the types of assets that it owns, the values of these assets and the degree of uncertainty about these values. Accounting statements do a reasonably good job of categorizing the assets owned by a firm, a partial job of assessing the values of these assets, and a poor job of reporting uncertainty about asset values. In this section, we will begin by looking at the accounting principles underlying asset categorization and measurement and the limitations of financial statements in providing relevant information about assets.

Accounting Principles Underlying Asset Measurement

The accounting view of asset value is to a great extent grounded in the notion of historical cost, which is the original cost of the asset, adjusted upward for improvements made to the asset since purchase and downward for loss in value associated with the aging of the asset. This historical cost is called the book value. Although the generally accepted accounting principles for valuing an asset vary across different kinds of assets, three principles underlie the way assets are valued in accounting statements.

An abiding belief in book value as the best estimate of value: Accounting estimates of asset value begin with the book value. Unless a substantial reason is given to do otherwise, accountants view the historical cost as the best estimate of the value of an asset.

A distrust of market or estimated value: When a current market value exists for an asset that is different from the book value, accounting convention seems to view it with suspicion. The market price of an asset is often viewed as both much too volatile and too easily manipulated to be used as an estimate of value for an asset. This suspicion runs even deeper when values are estimated for an asset based on expected future cash flows.

A preference for underestimating value rather than overestimating it: When there is more than one approach to valuing an asset, accounting convention takes the view that the more conservative (lower) estimate of value should be used rather than the less conservative (higher) estimate of value.

Measuring Asset Value

The financial statement in which accountants summarize and report asset value is the balance sheet. To examine how asset value is measured, let us begin with the way assets are categorized in the balance sheet.

First, there are the fixed assets, which include the long-term assets of the firm, such as plant, equipment, land, and buildings. Generally accepted accounting principles (GAAPs) in the United States require the valuation of fixed assets at historical cost, adjusted for any estimated gain and loss in value from improvements and the aging, respectively, of these assets. Although in theory the adjustments for aging should reflect the loss of earning power of the asset as it ages, in practice they are much more a product of accounting rules and convention, and these adjustments are called depreciation. Depreciation methods can very broadly be categorized into straight line (where the loss in asset value is assumed to be the same every year over its lifetime) and accelerated (where the asset loses more value in the earlier years and less in the later years).

Then, we have the short-term assets of the firm, including inventory (such as raw materials, works in progress, and finished goods), receivables (summarizing moneys owed to the firm), and cash; these are categorized as current assets. It is in this category accountants are most amenable to the use of market value. Accounts receivable are generally recorded as the amount owed to the firm based on the billing at the time of the credit sale. The only major valuation and accounting issue is when the firm has to recognize accounts receivable that are not collectible. There is some discretion allowed to firms in the valuation of inventory, with three commonly used approaches – First-in, first-out (FIFO), where the inventory is valued based upon the cost of material bought latest in the year, Last-in, first-out (LIFO), where inventory is valued based upon the cost of material bought earliest in the year and Weighted Average, which uses the average cost over the year.

In the category of investments and marketable securities, accountants consider investments made by firms in the securities or assets of other firms and other marketable securities, including Treasury bills or bonds. The way these assets are valued depends on the way the investment is categorized and the motive behind the investment. In general, an investment in the securities of another firm can be categorized as a minority, passive investment; a minority, active investment; or a majority, active investment. If the securities or assets owned in another firm represent less than 20 percent of the overall ownership of that firm, an investment is treated as a minority, passive investment. These investments have an acquisition value, which represents what the firm originally paid for the securities, and often a market value. For investments held to maturity, the valuation is at acquisition value, and interest or dividends from this investment are shown in the income statement under net interest expenses. Investments that are available for sale or trading investments are shown at current market value. If the securities or assets owned in another firm represent between 20 percent and 50 percent of the overall ownership of that firm, an investment is treated as a minority, active investment. Although these investments have an initial acquisition value, a proportional share (based on ownership proportion) of the net income and losses made by the firm in which the investment was made, is used to adjust the acquisition cost. In addition, the dividends received from the investment reduce the acquisition cost. This approach to valuing investments is called the equity approach. If the securities or assets owned in another firm represent more than 50 percent of the overall ownership of that firm, an investment is treated as a majority active investment. In this case, the investment is no longer shown as a financial investment but is replaced by the assets and liabilities of the firm in which the investment was made. This approach leads to a consolidation of the balance sheets of the two firms, where the assets and liabilities of the two firms are merged and presented as one balance sheet. The share of the equity in the subsidiary that is owned by other investors is shown as a minority interest on the liability side of the balance sheet.

Finally, we have what is loosely categorized as intangible assets. These include patents and trademarks that presumably will create future earnings and cash flows and also uniquely accounting assets, such as goodwill, that arise because of acquisitions made by the firm. Patents and trademarks are valued differently depending on whether they are generated internally or acquired. When patents and trademarks are generated from internal sources, such as research, the costs incurred in developing the asset are expensed in that period, even though the asset might have a life of several accounting periods. Thus, the intangible asset is not usually valued in the balance sheet of the firm. In contrast, when an intangible asset is acquired from an external party, it is treated as an asset. When a firm acquires another firm, the purchase price is first allocated to tangible assets and then allocated to any intangible assets, such as patents or trade names. Any residual becomes goodwill. While accounting standards in the United States gave firms latitude in how they dealt with goodwill until recently, the current requirement is much more stringent. All firms that do acquisitions and pay more than book value have to record goodwill as assets, and this goodwill has to be written off, if the accountants deem it to be impaired.

2.7 PROBLEMS OF ASSET VALUATION

Meggs (2004) ascertain that assets are initially recorded in the account at cost, and no adjustment is made to this valuation in later periods except to allocate a portion of this original cost represents the ‘fair market value’ of the goods and services exchange by an arm’s length transactions with the passage of time.

However, the fair market value of such assets as land and buildings may change greatly from their historical cost, the later change is fair market value in the balance sheet at historical cost (less the portion of that cost which has been allocated to expenses.)

Many accountants and users of financial statements believed that current market value, rather than historical cost should be used as the basis for asset valuation. This group argues that the use of current value would result in a more meaningful balance sheet. They also claimed that expenses showed in the income statements should reflect the current market value of the goods and services consumed in the effort to generate revenues.

Those who support the current cost principles argued that it is important that users have confidence in financial statement. Objective evidence generally exist to support historical cost.

At the end of each accounting year, the accounting department prepares a financial summary for the management among which is the balance sheet. The key to understanding of the basis of asset valuation will depend on the nature of the various items in the balance sheet and to consider the purpose for the recorded value.

In valuation of fixed asset the accountant faced with calculation of the asset faced value and calculation of total amount of depreciation and allocating the amount to a specific trading period.

Over valuation of current asset in the financial statement also needs to be avoided by the accountants, hence, accountants will face the problem of valuing current asset by their cost or market value which is lower.

2.7 BRIEF HISTORICAL BACKGROUND OF NIGERIAN BOTTLING COMPANY, PLC.

The Nigerian bottling company plc was incorporated in 1961. The company went public in 1972 and is quoted on the stock exchange with 60% of its shares being owned by Nigerians.

The company holds the franchise for the bottling of coca-cola, oranges of soft drinks including coca-cola, fanta orange, sprite, krest, and bitter lemon in Nigeria. The company has subsidiary companies which include Nigerian bottling company, Benin which is wholly owned and produce soft drinks and plastic crates in Benin, Edo state, and crown produces crown cokes in Ijebu-ode of Ogun state.

CHAPTER THREE

RESEARCH METHODOLOGY

3.1 RESEARCH DESIGN

Research design is a pattern or an outline of a research project. It is a statement of only the essential element to a study those that provide the basic guideline for details of the research work. It comprise a series of prior decisions that are being taken together to provide a master plan for excellent research work.

Put in a simple way, research is a way of collecting data either from new or past records. It involves the evaluation and analysis of data collected in order to find out how the data will be used in a practical sense.

The researcher of this study adopts simple method of data collection involving administration of questionnaire in preparing this research study, the researcher also made use of tables and percentage as the basic instruments of data analysis.

While, the inferential tools was employed in order to describe the relationship between variables based on the administered questionnaires with the use of analysis at significance level of 5%.

3.2 AREA OF THE STUDY

The research work is to assess the impact of asset valuation and its effect on the financial statements of manufacturing company, but the major focus of the researcher is Nigerian bottling company plc, Lokoja branch office.

3.3 POPULATION OF THE STUDY

According to Toluhi (2001) “research population directly relates to the group of people or objects the researcher is taking as his case study”. The population of this research work comprises of both senior and junior staff of Nigerian bottling company plc lokoja branch office, which is 42.

3.4 SAMPLE OF THE STUDY.

Sample refers to the part or fraction of a population that is subjected to detail and wide ranging examination. (Toluhi, 2001).

A sample size of 25 staff is drawn from the total staff of Nigerian bottling company plc Lokoja. Judgments or purposive sampling will be used in this sample selection in order to meet the requirement of the intention of this work.

3.5 DESCRIPTION OF INSTRUMENTS

Descriptions of instruments are typically collected through a questionnaire. It determines and reports the ways things are, it involves assessing attitudes or opinions towards individuals business.

A well structured questionnaire designed for this study was used to collect data from the selected case study. The methods effectively supplements the information gathered from secondary data. Secondary source of data is the annual reports of a company (NBC) plc lokoja branch. It provides a review of published account of NBC.

3.6 METHOD OF DATA COLLECTION

Reliable information is the “life-blood” of research surveys. The data used for the purpose of this study is the primary data. Primary data are data collected primarily and for the first time. They are usually collected and used for a specific purpose for which they are required.

Most research work use some form of questionnaire either posted or administered through personal visitation. Questionnaires are the backbone of most surveys and require careful planning and execution.

Questionnaires were mailed to the sample of the research population. This method is specifically attractive on account of cheapness.

3.7 ADMINISTRATION AND RETRIEVAL OF INSTRUMENT

The researcher took a great pain in ensuring that instruments for information gathering are effectively administered. Thirty five (35) questionnaires were administered, and twenty five (25) questionnaires retrieved in which one on one method was used to administer and retrieve the questionnaires. The number of non-retrieved questionnaires was ten (10).

The researcher then resolved into personal and face to face administration of questionnaire in which respondents are issued set of questionnaires to answer and as well asked some oral questions in which they delightedly responded to.

3.8 METHOD OF DATA ANALYSIS

The data analysis involves how the information was placed and analyzed.

There are several ways through which research adopts the used of table and percentage in analyzing the research data collected. Questionnaires were administered to respondents and their responses were analyzed in a tabular form with percentage as the basis of analysis. The use of table and percentage makes the analysis to be precise, accurate and properly structured.

The researcher also made use of chi-square method to analyze data which will be in details in the next section.

CHAPTER FOUR

4.0 PRESENTATION AND ANALYSIS OF DATA

In this chapter, the data collected for the purpose of this research work will be presented and analyzed in a form that can be easily understood and interpreted by the users of this research work.

4.1 PRESENTATION OF DATA

Presentation of data involves the organization of data collected on the field in a form that will be easily understood by users. Data in this regard can be presented in so many ways; it could be presented in charts diagrams, graphs, tables etc.

In the course of this research study, the researcher adopted the use of table in presenting the data used.

The process of data collection is undertaken as stated in the previous chapter through qualitative technique including semi-structure and qualitative key informant. Data collected through these techniques is thus presented in themes and analyzed.

Out of thirty five (35) questionnaires administered in the course of this investigation 25 were duly completed and returned, while 4 were returned uncompleted and 6 were not returned.

4.2 ANALYSIS OF DATA

Having classified and tabulated the data, the next thing is to obtain the parameter of the population (data), which will later be used for analysis and inference.

This follows immediately after data has been processed into a more comprehensive form that will enable the researcher as well as the users to extract relevant information. Data analysis takes many forms, and shapes ranging from simple comparison to complex statistical and mathematical analysis to display various features of the processed data.

The instrument of data analysis used by the researchers of this research study is percentage (%).

Table 1 Age Distribution of Respondents

Alternatives	No. of Responses	Percentage %
20 -30 31 –40 41 – 50 51 - 60 60 and above	6 10 5 4 0	24.0% 40.0% 20.0% 16.0% 0.0%
Total	25	100%