Question

what is the difference between a book-value balance sheet and a market value balance sheet? Which provides better information to investors and management.

Answer 1

The book value of an asset is the value of that asset on the accounting books and the balance sheet of the company.

It's important to note that the book value is not necessarily the same as the fair market value. Book value is used for an accounting and tax calculation.

• The book value of a company = Assets - liabilities on the Balance sheet.
• The book value of shareholder's equity, which is the value of a shareholder's account minus any liabilities shared by the shareholder.

How is Book Value Calculated:

Book value is calculated on property assets that can be depreciated. Depreciable assets have a lasting value, such as furniture, equipment, and other personal property of a business. Book value also is shown for buildings.

The calculation of book value for an asset = original cost of the asset - the accumulated depreciation to the date of the report.

After the initial purchase of an asset, there is no accumulated depreciation yet, so the book value is the cost. Then, as time goes on, the cost stays the same, but the accumulated depreciation increases, so the book value decreases.

At some point, the book value may only represent salvage or scrap value, after all the depreciation has been taken.

The fair market value of an asset is the price someone would pay for it in an "arm's-length transaction," which accounting standards define as a sale between an unrelated seller and buyer, neither of whom is under pressure to make the deal.

Companies may have a good idea of the fair market values of their assets, but they can't use those values on the balance sheet because the only way to "prove" that they're correct would be to actually sell the assets.

The reason some securities can be marked to market is that their fair market value can be easily and objectively determined simply by looking at the current price in financial markets.

Market value of balance sheet provides better information to investor because it reflects current market information rather than historical cost in book value.