O'Reilly logo

Financial Statement Analysis: A Practitioner's Guide, Fourth Edition by FERNANDO ALVAREZ, MARTIN FRIDSON

Stay ahead with the world's most comprehensive technology and business learning platform.

With Safari, you learn the way you learn best. Get unlimited access to videos, live online training, learning paths, books, tutorials, and more.

Start Free Trial

No credit card required

Chapter 2

The Balance Sheet

The balance sheet is a remarkable invention, yet it has two fundamental shortcomings. First, while it is in theory quite useful to have a summary of the values of all the assets owned by an enterprise, these values frequently prove elusive in practice. Second, many kinds of things have value and could be construed, at least by the layperson, as assets. Not all of them can be assigned a specific value and recorded on a balance sheet, however. For example, proprietors of service businesses are fond of saying, “Our assets go down the elevator every night.” Everybody acknowledges the value of a company's human capital—the skills and creativity of its employees—but no one has devised a means of valuing it precisely enough to reflect it on the balance sheet. Accountants do not go to the opposite extreme of banishing all intangible assets from the balance sheet, but the dividing line between the permitted and the prohibited is inevitably an arbitrary one.1

During the late 1990s, doctrinal disputes over accounting for assets intensified as intellectual capital came to represent growing proportions of many major corporations’ perceived value. A study conducted on behalf of Big Five accounting firm Arthur Andersen showed that between 1978 and 1999, book value fell from 95 percent to 71 percent of the stock market value of public companies in the United States.2 Increasingly, investors were willing to pay for things other than the traditional assets that generally ...

With Safari, you learn the way you learn best. Get unlimited access to videos, live online training, learning paths, books, interactive tutorials, and more.

Start Free Trial

No credit card required