Valuation of Assets and Stock
Response to the following problem:
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.