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Evaluation and Pricing of Fixed Assets on Phantom Profits for Companies

Introduction

This research proposal will examine the impacts of evaluating and pricing of fixed assets on phantom profits for companies. The purpose of investing in business activities is to get profits, expand operations and control markets. However, macro and micro economic factors dictate the success of a business activity and push out weak investors. Inflation and inventory costs are the greatest fears of investors because they influence the gross profits of a business. The Generally Accepted Accounting Principles (GAAP) define phantom profits as the difference between the profits reported using historical costs versus that of replacement costs (Gertler & Kiyotaki, 2010). This research proposal will evaluate issues that affect the evaluation and pricing of fixed assets and how they impact on the profits of an organisation. In addition, the study highlights important issues like inflation and inventory costs and their roles in influencing the profit margins of businesses. The roles of key stakeholders will be examined to determine the impacts of their interactions with the practice of evaluating and pricing a company’s fixed assets.

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Literature Review

The topic of phantom profits has not been covered extensively compared with other business issues (Lev & Schwartz, 1971). However, the following are some of the secondary sources that will be used to support the research. Herbert G. Grubel examined the issue of tax reforms in Canada as a way of unlocking capital and enabling local and foreign investors to conduct their businesses comfortably (Barth, 2011). His findings revealed that most businesses incur heavy inventory costs, and this lowers their profit margins. Companies that overpriced their fixed assets were less likely to suffer the impacts of inflation while their counterparts risked going out of business. Grubel explored the impacts of tax reforms as the best way of unlocking capital and creating opportunities for businesses to expand (Grubel, 2000). This proposal highlights the need to examine the impacts of reforms in taxation and how this practise affects depreciation and the value of fixed assets. Taxation affects the prices of goods and services and has significant impacts on the appreciation or depreciation rates of fixed assets.

John T. Wells claimed that the issue of evaluating and pricing fixed assets has been misinterpreted for a long time because auditors ignore the roles of phantom inventory (Sauaia, 2014). He argued that auditors should identify phantom inventory and include the costs of acquiring them when evaluating and pricing fixed assets. This author is right in arguing that businesses may spend money unnecessarily during their first months of operations (Wells, 2011). These inventories do not add value to the goods bought for sale. In addition, their values depreciate significantly, and auditors should be aware of all these inventories that cost companies huge expenses during their initial stages yet they do not have the same value a few months later. The information provided by Wells will be used as a guide to ghost goods and their values in phantom profits.

Research Questions

The research will use the following questions to direct and help the researcher to focus on pertinent issues regarding the topic. These questions will guide the scope of the study, but this does not mean that important sections related to the research will be ignored. The researcher has a duty of ensuring that the study gives room for extensive investigation of the impacts of evaluating and pricing of fixed assets on phantom profits for businesses. The following questions will be answered.

  1. What is the relative influence of evaluation and pricing techniques on the value of fixed assets and phantom profits of companies?
  2. Does a relationship exist between the value of fixed assets and the expected phantom profit of a business?
  3. Does the effectiveness of the pricing and evaluation of fixed assets techniques affect the value of a fixed asset and phantom profit?
  4. What is the relationship between the pricing and evaluation methods and the phantom profit of a business?

These questions will guide the researcher to identify areas that should be investigated. However, the researcher is not limited to these questions. The researcher has the freedom for additional questions that are deemed necessary for obtaining credible and reliable information. Research questions enable researchers to form a hypothesis before going to the field. The results obtained will be used to test the hypothesis that was formulated using research questions.

Research Objectives

The objectives of this research area aimed at unravelling the truth about the impacts of evaluation and pricing of fixed assets on phantom profits. The first objective will involve identifying evaluation and pricing techniques that companies may use to determine the value of their fixed assets. Issues like inflation and depreciation of property value influence the cost of fixed assets. The researcher will identify the assets that have higher depreciation rates and those that are adversely affected by inflation. The second objective will involve identifying the influences of the value of fixed assets on the expected phantom profits. Moreover, the researcher will focus on these and other variables that affect the value of fixed assets. Thirdly, the researcher should know that there are various techniques for evaluating the value of fixed assets. These techniques may not be applicable to all assets. For instance, assets whose values appreciate may have a different evaluation and pricing technique that cannot work on those that depreciate. Therefore, the objective of the researcher will include identifying and testing the effectiveness of pricing and evaluation techniques used in the study. Lastly, the researcher is supposed to identify the relationship between the pricing and evaluation methods and the phantom profit of a business. It is necessary to explain that the techniques that will be used to evaluate and set the prices of fixed assets should project an accurate phantom profit (Damodaran, 2012). The values obtained using these techniques should not exceed the expected phantom profit by significant margins when other methods are used.

Research Methodology

The researcher will use a cross-sectional design to analyse the phantom profits of companies using different evaluation and pricing techniques. This research will use the values of fixed assets as independent variables while the phantom profits will be the dependent variables. The cross-sectional framework will enable the researcher to evaluate and price fixed assets within a reasonable range of their actual values. In addition, the researcher will develop a pilot study to evaluate the suitability of the companies to be used in the case study, feasibility of design and analysis techniques and the reliability of all the instruments used. The sample company will be selected from a group of mid-size companies located in Saudi Arabia. This company should have been in operation for more than ten years and reported a steady financial growth in profitability, asset and production volume. The financial record of its previous year will be used for evaluating its profits. In addition, the value of its fixed assets will be calculated using the current exchange rates. In addition, the balance sheets and trading, profit and loss accounts for the previous three years will also be used to calculate the value of the chosen company (Aboody, 2009). The data collected will be recorded in tables, graphs and figures to show the various financial positions of the business. In addition, the researcher will consult relevant financial institutions in Saudi Arabia to validate the credibility of the data collected. The researcher should liaise with the local authorities and targeted companies to get permission and prior knowledge about the legal and economic requirements before conducting this research (Hurst, 2010). The data collected will be analysed using tables, figures and charts to make comparisons between the companies selected. In addition, the researcher will present the outcomes of different techniques used to evaluate and determine the prices of the fixed assets of these companies.

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The Significance of the Research

The research findings will be used to evaluate the impacts of the prices of fixed assets on phantom profits. In addition, it will be used to evaluate the effectiveness of various property evaluation and pricing techniques. Other relevant stakeholders will use the results as reference materials in the future. The sample companies used will use the information to evaluate their performance and correct mistakes in weak areas to improve productivity.

References

Aboody, D 2009, ‘Revaluations of fixed assets and future firm performance: Evidence from the UK’, Journal of Accounting and Economics, vol. 26, no.1, pp. 149-178.

Barth, M E 2011, ‘The relevance of the value-relevance literature for financial accounting standard setting: another view’, Journal of Accounting and Economics, vol. 31, no. 1, pp. 77-104.

Damodaran, A 2012, Investment Valuation: Tools and Techniques for Determining the Value of Any Asset, John Wiley & Sons, New Jersey.

Gertler, M & Kiyotaki, N 2010, ‘Financial intermediation and credit policy in business cycle analysis’, Handbook of Monetary Economics, vol. 3, no. 3, pp. 547-599.

Grubel, H G 2010, Unlocking Canadian Capital: The Case of Capital Gains and Tax Reforms, The Fraser Institute, Vancouver.

Hurst, E 2010, ‘The importance of business owners in assessing the size of precautionary savings’, The Review of Economics and Statistics, vol. 92, no. 1, pp. 61-69.

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Lev, B & Schwartz, A 1971, ‘On the use of the economic concept of human capital in financial statements’, Accounting Review, pp. 103-112.

Sauaia, A C A 2014, ‘Evaluation of Performance in Business Games: financial and non-financial approaches’, Developments in Business Simulation and Experiential Learning, pp. 28.

Wells, J T 2011, ‘Ghost goods: How to spot phantom inventory’, Journal of Accountancy, vol.191, no. 6, pp. 33-38.

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StudyCorgi. (2022, July 31). Evaluation and Pricing of Fixed Assets on Phantom Profits for Companies. Retrieved from https://studycorgi.com/evaluation-and-pricing-of-fixed-assets-on-phantom-profits-for-companies/

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StudyCorgi. (2022, July 31). Evaluation and Pricing of Fixed Assets on Phantom Profits for Companies. https://studycorgi.com/evaluation-and-pricing-of-fixed-assets-on-phantom-profits-for-companies/

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StudyCorgi. "Evaluation and Pricing of Fixed Assets on Phantom Profits for Companies." July 31, 2022. https://studycorgi.com/evaluation-and-pricing-of-fixed-assets-on-phantom-profits-for-companies/.

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StudyCorgi. 2022. "Evaluation and Pricing of Fixed Assets on Phantom Profits for Companies." July 31, 2022. https://studycorgi.com/evaluation-and-pricing-of-fixed-assets-on-phantom-profits-for-companies/.

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StudyCorgi. (2022) 'Evaluation and Pricing of Fixed Assets on Phantom Profits for Companies'. 31 July.

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