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Strategies & Market Trends : Bob Brinker: Market Savant & Radio Host -- Ignore unavailable to you. Want to Upgrade?

To: kahunabear who wrote (5285)	5/31/1998 3:46:00 PM
From: Boca_PETE	Read Replies (2) \| Respond to of 42834

WS: RE: Current accounting principles are generally based on historical costs (what companies pay out and receive for what they buy and sell) which are objective and verifiable. Book value = Assets minus Liabilities. If companies carried all assets and liabilities at current value, they would need to recognize gains and losses before they are realized from objective verifiable transactions with third parties. There would be the need to agree on such current asset and liability values and how to determine them. Some assets, like operating property, plant and equipment are reflected at such historical costs (not current market value) less accumulated charges of such costs against earnings in the form of "depreciation". In capital intensive industries, such amounts are large. Other assets and liabilities that do not reflect current value include: 1. ) Prepaid Expenses and Deferred Charges (set up as assets at historical cost and amortized to earnings to match up with related revenues) 2. ) Held-to-Maturity fixed interest rate Long-Term Receivables and Long Term Debt which have changed in value due to interest rate fluctuations.. There are many other reasons that book value is NOT representative of Fair Value. In the case of Oil/Gas producing companies, the value of their net proved reserves in the ground are not reflected at all on the balance sheet, yet they have significant value when computing fair value of such companies. It's understandable that people not schooled in accounting could form false conclusions and expectations about the multitude of financial information disclosed in annual reports and SEC reports issued by companies. I guess that's why one needs to rely upon a good objective analyst at times. Hope this contributes to your understanding of the above. P