Answers: Chapter 5 - What the Balance Sheet Reveals


5.1: What does the book value of a company represent? 

Book value represents the difference between the assets and liabilities on the balance sheet. This is essentially the  value of the company if it were to go bankrupt.

 

5.2: Company A is exactly like Company B except that B has borrowed more money than Company B; which company will have a higher book value?

Since book value represents the difference between the assets and liabilities on the balance sheet, the company with less liabilities will have a higher book value.

Company B has borrowed more money - it has more debt, a type of liability  - than Company A. Company A will have a higher book value.

 

5.3: If a company needs to pay a bill one year from now, which of these items on its balance sheet can best tell if it can easily do so?

  1. Total Assets
  2. Total Assets divided by Total Liabilities
  3. Current Assets
  4. Current Assets divided by Current Liabilities
  5. Current Liabilities

The correct answer is #4
 The current ratio - current assets divided by current liabilities - is a measure of how likely a company can pay back the bill in a year. Since the bill is due in a year, it is considered a current - or short term (year or less) - liability.