What Is the Main Problem in Using a Balance Sheet

question 97

Multiple Choice

What is the main problem in using a balance sheet to provide an accurate assessment of the value of a company's equity?

• A)The balance sheet does not accurately represent the book value of assets held by the company.
• B)The equity shown on the balance sheet does not reflect the market capitalisation of the company.
• C)Knowing at a single point in time what assets a firm possesses and the liabilities a firm owes does not give any indication of what those assets can produce in the future.
• D)Valuable assets such as the company's reputation, the quality of its work force, and the strength of its management are not captured on the balance sheet.

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Definitions:

Impairment Test

An accounting procedure used to determine if an asset's carrying value exceeds its recoverable amount, indicating if the asset is impaired and the loss that needs to be recognized.

Junk Bond Market

A segment of the financial market that deals with high-risk, high-yield bonds issued by corporations with lower credit ratings.

International Mergers

The combination of companies from different countries into a single entity.

Poison Pill

A defensive strategy used by companies to avoid hostile takeovers by making the company less attractive to the potential acquirer.