Do financial statements report the value of the business as a whole

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No. The balance sheet of a business does not report what the market value of a company would be on the auction block. Financial statements are prepared on the going concern, historical cost accounting basis—not on a current market value basis. Until there is a serious buyer or an actual takeover attempt it's anyone's guess how much a business would fetch. A buyer may be willing to pay much more than or only a fraction of the reported (book value) of the owners' equity reported in its most recent balance sheet.

The market value of a publicly owned corporation's stock shares is not tied to the book value of its stock shares. (See Chapter 22 for review.) Market value, whether you are talking about a business as a whole or per share of a publicly owned corporation, is a negotiated price between a buyer and seller and depends on factors other than book value.

Generally speaking, there is no reason to estimate current re placement cost values for a company's assets and current settlement values of its liabilities.* Furthermore, even it this were done these values do not determine the market value of stock shares or the business as a whole.

The market value of a business as a whole or its stock shares depends mainly on its profit-making ability projected into the future. A buyer may be willing to pay 20 times or more the annual net income of a closely owned, privately held business or 20 times or more the latest earnings per share of publicly owned corporations. Investors keep a close watch on the price/earnings (P/E) ratios of stock shares issued by publicly owned corporations. (See Chapter 22 for review.)

Also, it should be mentioned that earnings-based values are quite different from liquidation-based values for a business. Suppose a company is in bankruptcy proceedings or in a troubled debt workout situation. In this unhappy position the claims of its debt securities and other liabilities dominate the value of its stock shares and owners' equity. Indeed, the stock shares may have no value in such cases.

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