Book Value – Definition and Usage
There are several definitions associated with the term ‘Book Value’ and depending on the context of its use, determines the correct definition and proper use. The three primary uses of the term are as follows:
- Stock, Corporate Value or Balance Sheet – simply stated as the equity value of a company divided by the number of shares held by investors. Most often refers to the total assets less intangibles in the asset section and less liabilities. Another way to think of this is to use the equity value on the balance sheet and subtract intangibles.
- Fixed Asset – when referring to a particular asset, it refers to the value on the balance sheet (books) which is traditionally calculated as purchase price less accumulated depreciation. On the flip side, book value is also used to provide the accounting value related to liabilities.
- Investment – the price plus fees for the purchase of stock or some other investment (security, bond, or insurance instrument).
From the above different uses, the reader would infer that the term is broad in scope and meaning. In reality, it is actually narrow in meaning. ‘Book Value’ is simply the accounting value of the particular asset. Or, it is the original value of the asset paid at the time of purchase less any utility consumed which is also another way of saying the accounting value. Any time the term is used, the statement made should include a reference to the particular use or category as identified above. Examples of setting the proper context include:
- A banker may ask the small business owner, ‘What is the book value of your business?’ Here the banker is referring the stock or corporate value.
- If an investor is comparing similar businesses in the same industry, he would want to know the book value of each business; in effect he is interested in the equity value for capitalization issues or possibly an indicator of working capital capacity.
- Sometimes an owner of a business is interested in knowing how much of a particular asset still sits on the books i.e. the net value (purchase price less accumulated depreciation). He may ask, ‘What is the book value of the truck?’ or ‘How much are my receivables worth?’ In both situations, the owner is trying to determine his financial position to determine a gain or loss upon sale or disposal of the particular asset.
- Any investment sold has a purchase price plus fees paid to acquire the investment. This is recorded as basis for the investment. When referring to investments such as stock, bonds or other commonly traded market securities, the book value is the price paid.
Remember, when this term is used, the term is a component of a statement referring to one of the three primary areas of business as identified above. Each of