3.4. The major categories of assets are current assets and fixed assets. Current
assets are those assets which the company intends to convert into cash in the
near future (within say less than one year). Fixed assets are those assets
which the company intends to use up over several years. The major
categories of liabilities are outside liabilities and liability towards
shareholders, know as net worth. Accountants treat a company as an entity
distinct from its shareholders whose stake in the firm is therefore treated as a
liability of the company towards its shareholders. The outside liabilities are
usually categorized into those which have to be met in the near future (say
within the next one year), which are known as current liabilities and those
liabilities which have to be met later, known as the long term liabilities.
- Net Worth and Book Value
4.1. A shareholder’s stake in the firm is divided into shareholder’s capital and
reserves. It can be observed from Table 5.1 that there are several kinds of
reserves. The share premium reserve is the amount paid by the shareholders
in excess of the par value of the shares. The shareholders capital and the
share premium reserve together represent the total amount of money
provided by the shareholders to the firm. The free reserves are the past
profits retained by the firm; these are available for distribution as dividends.
Both the share premium and the free reserves can be used by the company
for issuing bonus shares. The other kinds of reserves, created for specific
purposes, are not available for paying dividends and issuing bonus shares.
However, these reserves when no longer needed can be transferred to free
reserves.
4.2. The total net worth divided by the number of shares is the much talked about
book value of a share. For Shatabdi Industries, the book value turns out to be
Rs.127.70 on 31.03.1991 as against Rs.103.50 on 31.03.90. Though the
book value is often seen as an indication of the intrinsic worth of the share,
this may not be so for two major reasons. First, the market price of the share
reflects the future earnings potential of the firm which may have no
relationship with the value of its assets. Second, the book value is based
upon the historical costs of the assets of the firm and these may be gross
underestimates of the cost of the replacement or resale values of these assets.
It is not uncommon to find shares of good companies quoting five to ten
times their book value.
4.3. We now turn to the Profit and Loss Account of Shatabdi Industries given in
Table 2.
