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10 Questions

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Book Value vs. Market Value Discrepancy

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Questions and Answers

What is a major limitation of the balance sheet mentioned in the text?

It doesn't provide information on current assets.

It doesn't directly measure the market value of the entity. (correct)

It doesn't classify assets and liabilities.

It doesn't include liabilities.

How are current assets defined based on the text?

Assets consumed within one year or less, regardless of operating cycle.

Assets converted to cash within normal operating cycle only.

Assets converted to cash within one year or normal operating cycle. (correct)

Assets consumed within one year from the balance sheet date.

Why does Facebook have a market value to book value ratio well above 1 as mentioned in the text?

Because they include all costs in their balance sheet.

Because they classify assets as noncurrent.

Because they expense items in the year incurred. (correct)

Because they estimate receivables accurately.

What is included in equity (net assets) according to the text?

Total assets minus total liabilities. Signup and view all the answers

Why does a company's book value in the balance sheet not equal its market value?

Historical costs are used for assets instead of fair values. Signup and view all the answers

Which factor enhances the usefulness of the balance sheet according to the text?

Grouping assets and liabilities based on common characteristics. Signup and view all the answers

How does an increase in the fair value of land owned by a company impact its book value?

It has no effect on the book value. Signup and view all the answers

Why are aspects like trained employees and loyal customer relationships not recorded as assets in the balance sheet?

They have zero book value. Signup and view all the answers

What is the primary reason for investors reflecting resources like trained employees and experienced management team in a company's overall market value?

Understanding their ability to generate future profits. Signup and view all the answers

How does Facebook's annual spending on research and development impact its market value?

It demonstrates potential for future growth and innovation. Signup and view all the answers