Tag Archives | balance sheet

Book Value of Equity Per Share (BVPS)

Book Value of Equity Per Share (BVPS) Definition

Book Value of Equity per Share (BVPS) is a way to calculate the ratio of a company’s Stakeholder equity (as stated in the balance sheet) to the number of shares outstanding. Investors commonly use BVPS to determine if a stock price is under or overvalued by looking at the company’s current state.

Book Value vs Market Value

Investors use both Book Value and Market Value to build strong portfolios. The market price of a stock provides hints to the company’s future growth and financial stability. The book value reveals the current state of a company calculated by its balance sheet. Using both values can assist you in determining whether a stock is valued correctly, thereby helping you invest your money wisely. For example, a company’s BVPS is $4 and the market value is $10. In this case, it does not necessarily mean that the stock is overvalued. However, it might mean that the company’s assets have a high earning power or potential. In comparison, it doesn’t necessarily mean it is an undervalued stock if a company’s BVPS is $4 and the market value is $2. Instead, it might mean that the financial market has lost confidence in the company’s ability to generate future profits.

Formula

Calculate the BVPS of a company by dividing total stakeholder equity (excluding preferred shares) by total shares outstanding. Refer to the following formula to calculate BVPS:

BVPS =  Value of Common Equity / # of Shares Outstanding

Example of Book Value of Equity Per Share (BVPS)

For example, ABC & Co. has $30,000,000 of stockholder’s equity, $7,000,000 of preferred stock, and an average of 5,000,000 shares outstanding during the period measured. Calculate BVPS using the following formula:

$30,000,000 Stockholder’s Equity – $7,000,000 Preferred Stock ÷ 5,000,000 Average Shares Outstanding

= $4.60 Book Value Per Share

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Book Value of Equity Per Share (BVPS)

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Book Value of Equity Per Share (BVPS)

See also:
Price to Book Value Analysis
Price to Sales Ratio Analysis

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Balancing the Balance Sheet

See: Balance Sheet

Balance Sheet Definition

The balance sheet is a financial statement that shows a company’s financial position at a point in time. The balance sheet format comes in the following three sections:

The assets represent what the company owns. Then, the liabilities represent what the company owes. Finally, the owners’ equity represents shareholder interests in the company. The value of the company’s assets must equal the value of the company’s liabilities plus the value of the owners’ equity.

This balance sheet formula forms the basis of the statement, also known as the accounting equation.

Assets = Liabilities + Owners’ Equity

Balancing your balance sheet is one method of knowing your economics. To further shape your economics to result in profit, access the Know Your Economics Worksheet.

Balancing the Balance Sheet

The “balance” in balance sheet indicates the 2 sides have to balance every time. Therefore, the company‘s assets always have to equal liabilities plus owners’ equity. Now, let’s walk through the steps needed in order to know how to start balancing the balance sheet.

Balancing the Balance Sheet Steps

First, start by putting all the company‘s assets on the left side of the sheet. Let’s start with the current assets. For example:

ASSETS

Current Assets

  Cash                                    $  2,000

 Accounts receivable                        20,000

  Inventory                                 10,000

  Supplies                                   3,000

TOTAL CURRENT ASSETS:                    $  35,000

Now let’s add the other types of assets. These are “Property, Plant & Equipment” and “Intangible Assets“.

Property, Plant & Equipment

Land                                      $  5,000

Buildings                                  160,000                             

Equipment                                  200,000    

Less: acum depreciation                    (30,000)

NET PROP, PLANT & EQUIP                    335,000
Intangible assets

Goodwill                                   100,000

Trade names                                200,000

TOTAL INTANGIBLE ASSETS                    300,000
TOTAL ASSETS:                           $  670,000

Now that we have added all the assets together, go to the right side of the balance sheet. Record the liabilities – current and long-term.

LIABILITIES

Current Liabilities

   Notes Payable                         $  5,000

      Accounts Payable                     35,000

   Wages Payable                           10,000

       Interest Payable                     5,000

TOTAL CURRENT LIABILITIES                  55,000

Long-Term Liabilities

   Notes Payable                           50,000

   Bonds Payable                          500,000

TOTAL LONG-TERM LIABILITIES               550,000

TOTAL LIABILITIES                      $  605,000

After you have your liabilities, add the final portion of the balance sheet –  Owner’s Equity.

Owner's Equity

Common Stock                            $  50,000

Retained Earnings                          50,000

Less: Treasury Stock                      (35,000)

TOTAL OWNER'S EQUITY                    $  65,000

TOTAL LIABILITIES and OWNER'S EQUITY    $  670,000

Finally, you have added everything up. Now, verify if everything holds true to the accounting formula.

Assets = Liabilities + Owner's equity
$  670,00 = $  605,000 + $  65,000       

$  670,000 = $  670,000

Everything is balanced now, as it should be. If for whatever reason it does not end up balancing, look back at all your numbers and make sure they are all correct. If you need help shaping your economics, click here to download your free Know Your Economics guide.

Balancing the Balance Sheet

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Balancing the Balance Sheet

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Balance the Balance Sheet

A balance sheet is a statement of the companies health. How does the liabilities and equity compare to the assets? Balancing the balance sheet is a critical part of accounting as it gives the company, bankers, and investors an idea of how the company is doing. Does the balance sheet need to balance? Yes. It always needs to balance; otherwise, it’s an indicator that either something was forgotten or there is potential fraud.

Purpose of Balancing the Balance Sheet

The purpose of balancing the balance sheet is to create a snapshot of the company’s financial status. It highlights three important categories: assets, liabilities, and shareholder’s equity. In other words, the balance sheet looks at what the company owns, how much it owes to debtors, and how much is invested.

Before we go into how to balance the balance sheet, we need to know why we need to do that. It all comes down to double-entry accounting.

An important part of the financial leader’s role is to know the economics of the company. Access our Know Your Economics Worksheet to shape your economics to result in profit.

How to Balance the Balance Sheet

Use the following formulas to calculate each categories (assets, liabilities, and equity):

Assets = Liability + Equity

Equity = Assets – Liability

Liability = Assets – Equity

First, make two columns. In the first column, list your assets. In the second column, list both your liabilities and owner’s equity. Each column should balance to one another.

Reasons Why Your Balance Sheet Is Out Of Balance

If your balance sheet isn’t balanced, then you want to look in particular areas for inconsistencies. Some of these areas include retained earnings, loan amortization issues, paid in capital, and inventory changes.

Retained Earnings

Retained earnings can be tricky at times. After all, it is supposed to be the sum of all your net profits/losses ever since you began the business. If you have an accurate record of every number since you began, then this shouldn’t be a problem. However, a far to common problem is that some businesses do not have all the data required to calculate retained earnings. A common practice for this situation is to use retained earnings as a plug number and make it what it needs to be in order to balance the balance sheet.

Paid In Capital

Some people have misunderstanding of what “Paid in Capital” is, and one simple way to define it would be: The amount of money that was invested in the business to get you started. It can either be your own personal investment, or it can be capital contributed by investors. The sum of all initial investments should be under Paid in Capital in the owner’s equity section of the balance sheet.

Inventory Changes

One common mistake that some people forget to consider is inventory changes.  It might seem simple to just take a count of whatever inventory you have at the moment, but that may be inaccurate. If you are working towards financial projections, then you will need to predict future inventory amounts as well, and this will affect your balance sheet. A change in inventory also affects your cash flow statement. What you need to do is take the amount from last month’s inventory and subtract the amount from this month, then reduce your cash balance by that amount.

How to Protect Against Fraud With a Balance Sheet

After various global fraud scandals in 2002, the U.S Congress passed the Sarbanes-Oxley act which protected investors from the risk of fraud by corporations. It mandated strict improvements within the financial disclosures of corporations. It was responsible for the improvement of the following areas: corporate responsibility, increased criminal punishment, accounting regulation, and new protections.

If you need help shaping your economics, click here to download your free Know Your Economics guide.

Balancing the Balance Sheet

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Balance the Balance Sheet

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Shareholders’ Equity Definition

Shareholders’ Equity Definition

The Shareholders’ Equity Definition is one of the three primary components of the balance sheet: assets, liabilities, shareholders’ (or owners’) equity. These three components comprise the well-known accounting equation of assets = liabilities + shareholders’ equity. This equation is important when beginning to think about what shareholders’ equity means for a business.

The owners’ equity category includes two things: investments into the company and retained earnings from each period. The investments can be from when the company launched and from later points in time. The important part is recording the investment under the shareholders’ equity section on the balance sheet. These two combine to fill the gap between the value of a company’s assets and liabilities. Using this logic, you can see how it is equally important to know the value of your assets, liabilities, and shareholders’ equity. If any component is incomplete or inaccurate, the financials will not be complete.

Shareholders’ Equity Example

For example Company A started with a $100,000 investment from the sole owner. In the beginning, the owner’s equity account is equivalent to the owner’s investment. After one year of business, the company has $60,000 in net profit. The owner decides to pay $10,000 in dividends and sends the other $50,000 to retained earnings. Thus, the owner’s equity account grew by the same amount as the retained earnings for that period.

When discussing shareholders’ equity, it makes a difference whether the company is private/public or mature/startup. Private companies often use separate terms for things like stocks, owners’ equity, and dividends. Public companies have more regulations and shareholders to please, so the financials of public companies usually look different than those of a private company. It is important to know whether a company is mature or a startup when looking at the financials. For example, if a startup has a very large retained earnings account under owners’ equity, something is either incorrect or extraordinary. Similarly, if a mature company’s shareholders’ equity is largely composed of owner investments and new partners’ investments, it could represent a struggling business. If the business is not creating enough net profit to reinvest into the company, it would have more owner investments than retained earnings.Shareholders' Equity Definition

See also:
Balance the Balance Sheet
Accounting Department Efficiencies
Balancing the Balance Sheet
Financial Assets
Current Liabilities

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Unearned Revenue

Unearned Revenue Definition

Unearned revenues are titles for certain revenues that have not been earned. You can also call unearned revenues deferred revenues. Though it seems comically intuitive, unearned revenue is very important and often observed in the real world. In accounting, they are represented as liabilities on the balance sheet. This is because it represents an unfulfilled promise for a service by a company to a buyer. Furthermore, it is represented by a credit on the balance sheet, offset by Cash received by the service provider. In order to balance this liability, service revenue is the debit to the balance sheet that matches up with the unearned revenue credit.

Unearned Revenue Explained

Take, for example, a business situation that would exist between a carpet cleaning company and a homeowner. Before any service takes place, the cleaning company shows up at the house and gives the homeowner an estimate. The homeowner seems pleased with the estimate and pays the cleaner on the spot. At this point, the cleaning company has acquired an unearned revenue liability. In all likelihood, the liability will be cleared overtime with service. Until then, the cleaning company has money that they have not yet earned: “unearned revenue.”

unearned revenue

See Also:
Accounts Payable

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Treasury Stock

Treasury Stock Definition

The treasury stock definition is the shares a company buys of its own stock on the open market. Shares of treasury stock were issued by the company, and then repurchased. So consider it issued, but not outstanding. After a company repurchases shares of its own stock, there are fewer shares of its stock trading on the open market.

Treasury stock can either be retired (cancelled) or resold on the open market. In addition, the shares have no voting rights, and they do not pay or accrue dividends. It is not included in financial ratios that use the value of common stock.

Treasury Stock on the Balance Sheet

Record treasury stock in the owner’s equity section of the balance sheet. Then record it at cost – what the company paid to acquire the shares – and subtract the value of the treasury stock from the stockholders’ equity account. The treasury stock account is a contra-equity account.

Stock Buyback (Repurchase Shares; Buyback Shares)

There are several reasons why a company would repurchase its own shares, including the following.

1. A company might buyback shares if it considers its stock undervalued. If the stock is undervalued, then management might want to buy shares because they consider them cheap.

2. Fewer outstanding shares increase the value per share, so a company might buyback shares to benefit its shareholders. For tax reasons, a share buyback can be superior to paying dividends to shareholders. (Depending on the difference between the tax rate that applies to dividends and the tax rate that applies to capital gains.)

3. A company can also repurchase shares to exercise stock options or to convert convertible bonds.

4. You can use stock buyback to thwart a takeover – if a company buys its own stock, then that stock is no longer available to the potential acquirer.

5. A company can alter its debt-to-equity ratio by issuing bonds and using the proceeds to repurchase stock.

6. A stock buyback could also be a sign that the company has excess cash and no other viable investment opportunities.

Treasury Stock Definition

See Also:
Convertible Debt Instrument
Common Stock Definition
Reverse Stock Split
Preferred Stocks
Hedging Risk
Private Placement

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Trade Credit

See Also:
5 Cs of Credit
Credit Sales
Standard Chart of Accounts
Income Statement
Free Cash Flow

Trade Credit Definition

Trade credit refers to postponing payment for goods or services received. It is buying goods on credit, or extending credit to customers. It is also receiving goods now and paying for them later. And trade credit is delivering goods to a customer now and agreeing to receive payment for those goods at a later date. Trade credit terms often require payment within one month of the invoice date, but may also be for longer periods. Most of the commercial transactions between businesses involve trade credit. This type of credit facilitates business to business transactions and is a vital component of any commercial industry.

If a consumer receives goods now and agrees to pay for them later, the goods were purchased with trade credit. Likewise, if a supplier delivers goods now and agrees to receive payment later, the sale was made with trade credit. There are two types of trade credit: trade receivables and trade payables. Trade credit payables and receivables can become complex and it is important to manage trade credit properly and accurately.

Accounting Trade Credit

For accounting purposes, the value of goods bought on credit is recorded on the balance sheet in an account called accounts payable, representing money the company owes for goods it already received. These are trade payables.

While the value of goods sold on credit is recorded on the balance sheet in an account called accounts receivable, representing the money owed to a company for goods it already delivered to customers. These are trade receivables.

Trade credit is essentially a short-term indirect loan. When a supplier delivers goods to a buyer and agrees to accept payment later, the supplier is essentially financing the purchase for the buyer. Trade credit is an interest-free loan. As long as the buyer postpones payment, the buyer is saving the money that would have been spent on interest to finance the purchase with a loan. At the same time, the supplier is losing the interest it would have earned had it received the payment and invested the cash. Therefore, the buyer wants to postpone payment as long as possible and the supplier wants to collect payment as soon as possible. That is why suppliers often offer discount credit terms to buyers who pay sooner rather than later.

Trade Receivables Definition

Trade receivables represent the money owed but not yet paid to a company for goods or services already delivered or provided to the customer. The goods were delivered and the sale was recorded. But the cash was not yet received. Record trade receivables as an asset on the balance sheet in an account called accounts receivable.

Trade Payables Definition

Trade payables represent the money a company owes but has not yet paid for goods or services that have already been delivered or provided from a supplier. The goods were received, the expense was recorded, but the cash was not yet paid. Trade payables are recorded as a liability on the balance sheet in an account called accounts payable.

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trade credit
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