Question:
Explain why the balance sheet does not portray the market value of the entity.
Answer:
The balance sheet does not portray the market value of the entity (number of common stock shares
outstanding multiplied by price per share) for a number of reasons. Most assets are not reported at fair
value, but instead are measured according to historical cost. Also, there are certain resources, such as
trained employees, an experienced management team, and a good reputation, that are not recorded as
assets at all. Therefore, the assets of a company minus its liabilities, as shown in the balance sheet, will
not be representative of the company’s market value.
Explain why the balance sheet does not portray the market value of the entity.
Answer:
The balance sheet does not portray the market value of the entity (number of common stock shares
outstanding multiplied by price per share) for a number of reasons. Most assets are not reported at fair
value, but instead are measured according to historical cost. Also, there are certain resources, such as
trained employees, an experienced management team, and a good reputation, that are not recorded as
assets at all. Therefore, the assets of a company minus its liabilities, as shown in the balance sheet, will
not be representative of the company’s market value.
