![]() Google has no "inventory" (ever bought an off-the-shelf product from them?) but has a lot of cash, investments, and equipment. Now you can examine a company and see what it's worth (on paper) and where the value lies. What it does owe are "accounts payable" - the equivalent of a credit-card bill (usually paid within a short timeframe). Wow - Google doesn't have many liabilities! Only \$1.4B (of the total \$18B) and there's no long-term debt. Now examine the other side of the equation, liabilities and owner's equity: In reality, most companies are worth several times their reported assets Google's market cap is over 10x the book value (but read more about stocks to see why market cap is not quite right). How do you measure momentum? Employee morale? A brand? Customer loyalty?Īccountants try to quantify items like this with intangible terms like "Goodwill", but it's not easy. ![]() There's many, many reasons why assets may be over or under-valued on the books. Take a look at the balance sheet for a small internet company:Īssets are broken into short-and long-term categories the company is worth about \$18 billion on the books (as of Dec 2006). But the core idea is the same: show what the company's worth, and who owns what. ![]() Well, real accountants use fancier terms ("accounts receivable" vs "deadbeats who owe me"), and have a bigger, badder balance sheet. Our share of the company (\$100) didn't change a lick. Instead of \$250 in cash, we have \$50 in cash and \$200 in "building". Next, let's buy a building for \$200: Assets:īuying a building doesn't make our company more valuable: we re-arranged our assets. Sorry guys - you can't take out a loan and make your share of the company more valuable. Now our company has \$250, but \$150 belongs to the bank and \$100 belongs to the owners. Now suppose we take a bank loan for \$150. The company has \$100 in short-term investments, and the owners have \$100 worth of stock (how ownership is represented in a company). Suppose we start a company with \$100 cash: Assets: As you know, if the company's has something, it belongs to someone. What's a balance sheet?Ī balance sheet is a document that tracks a company's assets, liabilities and owner's equity at a specific point in time. This equation looks more natural, but often we aren't interested in the owner's point of view. If the company has something, it could be owed to someone else.įrom the owner's point of view, owner's equity = assets - liabilities. ![]() Why do we add liabilities and equity? Because we're looking from the point of view of the company, not the shareholders. This formula (also called ALOE) might seem strange at first. stuff the company has = other people's stuff owner's stuff.In layman's terms, everything the company has belongs to the owners or someone else. Now how are these related? Assets = Liabilities Owner's Equity ![]()
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