Chapter 4, Problem 4C

Valuation of Assets and Stock

A friend has come to you for advice. He states that he owns several shares of stock in a corporation. He has examined the most recent balance sheet of the corporation and has found that the common stock issued and outstanding totals 40,000 shares, and the market price per share is $25 on the balance sheet date. He is sure that the balance sheet must be in error because, in his words, “the total assets are $1,100,000 and this current value should be the same as the $1,000,000 total value of the outstanding common stock.”

Required:

Explain to your friend how the “values” of the various assets of the corporation typically are measured and reported on its balance sheet, and how the “value” of the $1,100,000 total assets is determined. Continue the discussion by explaining to your friend why the “values” of the assets and the stock are not the same.