Accounting For Dummies®, 4th Edition

5.5. Costs and Other Balance Sheet Values

In my experience, the values for assets reported in a balance sheet can be a source of confusion for both business managers and investors, who tend to put all dollar amounts on the same value basis. In their minds, a dollar is a dollar, whether it's in accounts receivable, inventory, fixed assets, accounts payable, or retained earnings. However, this naïve assumption glosses over important differences and can lead to serious misinterpretation of the balance sheet. A balance sheet reports a rainbow of values — not just one color. This is the nature of the generally accepted accounting principles (GAAP) — the accounting methods used to prepare financial statements for the external financial reporting by a business (see Chapter 2).

NOTE

Book values are the amounts recorded in the accounting process and reported in financial statements. Do not assume that the book values reported in a balance sheet necessarily equal the current market values. Book values are based on the accounting methods used by a business. Generally speaking, the amounts reported for cash, accounts receivable, and liabilities are equal to or are very close to their current market or settlement values. For example, accounts receivable will be turned into cash for the amount recorded on the balance sheet, and liabilities will be paid off at the amounts reported in the balance sheet. It's the book values of inventory and fixed assets, as well as any other assets in which the ...