136 ShowMetheMoney
Perhaps more obviously, if Coke were liquidated, its inventory of
syrup and concentrate would undoubtedly fetch far less in a fire sale
of those goods than the amount at which they are carried as inven-
tory on its balance sheet.
This does not mean that the balance sheet is useless. It is a
starting point for analysis. All the historical numbers can be adjusted
to reflect prevailing economic conditions. On the upside, inflation
an dappreciation in market values can be acknowle dge dto arrive at
a current measure of the financial value of assets. Guides to this
adjusting of old numbers to new conditions include sales prices of
similar property an dincreasing asset amounts base don changes in
the consumer price index.
On the downside, the historical amount of assets recorded on a
balance sheet can be reduced to the amount they could be sold for
in a fire sale upon liquidation of the business. How much to reduce
the amounts for things such as inventory an daccounts receivable
woul d depen don their respective turnover rates. Amazon.com’s in-
ventory, for example, turns so quickly (24 times a year) that even in
a fire sale the company woul dprobably be able to get ri dof it at
pretty close to cost (the amount liste don its balance sheet). Some
of GE’s inventory, which turns only eight times per year, might have
to be sol dat a loss.
Even those adjustments may not serve as an accurate basis for
financial valuation, however, because of another accounting princi-
ple: the principle of economic or monetary exchange. A business
enterprise may have financial value derived from intangible assets
that are not recorded in the financial statements because they were
not attributable to any discrete economic exchange. For example,
only the cost of development of intellectual property (such as pat-
ents, trademarks, and copyrights) is recorded as an asset on the bal-
ance sheet even if the property is worth billions of dollars in the
form of bran drecognition or customer loyalty.
You undoubtedly recognize the GE brand name, for instance,
an dcollective consumer recognition is certainly valuable, but you
will not see any line item for GE’s bran dnames an dassociate din-
tellectual property on its balance sheet. The same is true for com-
pany know-how, employee capital an de ducation, an dsimilar items
increasingly crucial to many companies in a wide variety of busi-
nesses, particularly but not exclusively companies such as Microsoft
an dAmazon.com.
These sources of value are referre dto as economic goo dwill, a