Explain the difference between accounting(Book) value and market value. Which is more important to the financial...

Explain the difference between accounting(Book) value and market value. Which is more important to the financial manager? Why?

Expert Solution

Explain the difference between accounting(Book) value and market value.

The book value of an asset is its original purchase cost, adjusted for any subsequent changes, such as for impairment or depreciation. Market value is the price that could be obtained by selling an asset on a competitive, open market.
Book Value is a recorded historical cost whereas market value is based on the perceived supply and demand for an asset, which can vary constantly.
Book Value is the actual worth of an asset of the company whereas Market Value is just a projected value of the firm’s or asset’s worth in the market.
Book Value is equal to the value of the firm’s equity. Conversely, Market Value shows the current market value of the firm or any asset.
Book Value changes annually, but Market Value changes every next moment.
For the calculation of book value, only tangible assets are taken into consideration, but market value considers both tangible as well as intangible assets.
Book Value is always readily available, however, the projection of market value on the current market price of a single share, it is not readily available.
When the book value is greater than the market value there is profit, but if the book value is less than the market value there is a loss. However, if these two values coincide, there is a situation of no profit no loss for the company.

Which is more important to the financial manager? Why?

The accounts on the balance sheet are generally carried at historical cost, not market values.
Although the book value of the current assets and the liabilities may closely approximate market values, the same cannot be said for the rest of the balance sheet accounts.
Market values are more relevant as they reflect today's values whereas the balance sheet reflects historical costs as adjusted by various accounting methods.
To determine the current value of a firm, and it’s worth to the shareholders, financial managers must monitor market values.

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