Week 3 Net Worth
Net Worth
(see Amalgamated Hat Rack’s balance sheet for Dec 31, 2016 below)
| 2015 | 2016 | |||
| Assets | ||||
| Cash and marketable securities | $355,000 | $430,000 | ||
| Accounts receivable | $555,000 | $512,000 | ||
| Inventory | $835,000 | $755,000 | ||
| Prepaid expresses | $123,000 | $98,000 | ||
| Total current assets | $1,868,000 | $1,795,000 | ||
| Gross property, plant, and equipment | $2,100,000 | $1,900,000 | ||
| Less: accumulated depreciation | $333,000 | $234,000 | ||
| Net property, plant, and equipment | $1,767,000 | $1,666,000 | ||
| Total assets | $3,635,000 | $3,461,000 | ||
| Liabilities and Owner's Equity | ||||
| Accounts payable | $450,000 | $430,000 | ||
| Accrued expenses | $98,000 | $77,000 | ||
| Income tax payable | $17,000 | $9,000 | ||
| Short-term dept | $435,000 | $500,000 | ||
| Total current liabilities | $1,000,000 | $1,016,000 | ||
| Long-term dept | $750,000 | $660,000 | ||
| Total liabilities | $1,750,000 | $1,676,000 | ||
| Contributed capital | $900,000 | $850,000 | ||
| Retained earnings | $985,000 | $935,000 | ||
| Total owner's equity | $1,885,000 | $1,785,000 | ||
| Total liabilities and owner's equity | $3,635,000 | $3,461,000 | ||
Table: Amalgamated Hat Rack Balance Sheet as of December 31, 2016 Updated
Reference: Adapted from Finance for Managers, Harvard Business Essentials (2002). Updated
This is also known as the book value of the firm. Since the firm's assets are usually recorded on the balance sheet at cost, the book value figure also indicates--generally-- what the current owners paid for the firm.
Question: What was Amalgamated Hat Rack's Net Worth at the end of 2016?
Answer: Net Worth = Tot Assets - Tot Liabilities – Preferred stock (if any)
For Amalgamated Hat Rack at the end of 2016:
| Net Worth = | $3,461,000 - $1,676,000 - $0 | |
| = | $1,785,000 |
Note that this is the same value as total owner’s equity. In fact, owner’s equity, book value, and net worth all refer to the same thing.
Question: How much is Amalgamated Hat Rack's name and reputation worth?
Answer: Nothing, according to the balance sheet, because there isn't any "goodwill" or "intangible assets" account shown.
This illustrates why the market value of a firm is usually different from its book value. Accountants are very conservative; they will only let you record values on the firm's balance sheet that can be substantiated by hard evidence (like the receipt showing how much you paid for something).
The market value of the firm, on the other hand, as measured by the number of shares of stock outstanding x the price of each share. It depends on investors' expectations about the future of the firm; that is, how much money they think the firm will bring in... in the future. The market value of the firm would include the value of the firm's name and reputation, but the book value would not.