From the course: Financial Accounting Part 1
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Limitations of the balance sheet
From the course: Financial Accounting Part 1
Limitations of the balance sheet
- Okay, let's discuss some of the balance sheet's limitations. For example, Microsoft's net assets, that is its assets less its liabilities, was about $83 billion as of June 30th, 2018. Microsoft's market value on that day was about $758 billion. Why the difference? Many individuals think that a balance sheet reflects a company's market value. Well, it doesn't, and it isn't supposed to. Knowing that right from the start puts you ahead of a lot of people who do not know their way around a balance sheet. External users often want to know a company's worth. The balance sheet, however, does not generally reflect the current value of a business. Why? Well, many assets are reported at historical cost, the cost that was originally paid, which is usually less than the market value, and other assets are not included in the balance sheet at all. In addition, many intangible economic assets such as the reputation for superior…
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