Chapter 2, Problem 5CRCT

Summary Introduction

To critically think about:The occurrence of negative shareholders’ equity with market values.

Introduction:

Market value refers to the value that the asset will fetch if it is sold in the open market. The firm records its assets at historical cost instead of the market value. Historical costs are lower than the market value. Hence, the value of liabilities sometimes exceeds the value of assets resulting in negative shareholders’ equity. However, there will be no negative shareholders equity when the market values are used.