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principles of Finance, a la shmoop. the sauce company -all right let's bring

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our attention back to the sauce company. and take a look at their balance sheet.

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well as you can see the company's equity at this point looks like this: five [balance sheet pictured]

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hundred thousand of preferred stock in a million bucks of common stock. so at

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inception Artie and Bernie owned the company fifty-fifty. halfsies. between the

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two of them they own 100% but now each instead of owning 50% owns

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33% assuming a you know successful outcome. so the net worth of the company

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is now $500,000. it's just the cash. that's the net worth there's a million

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dollars of perceived value here though. why? what did Reid buy? well he's a savvy

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guy he knows that Artie and Bernie at 21 are not exactly the Michael Jordan of [Bernie, Artie and Reid pictured]

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the global scale food distribution. in Reid's mind the million bucks pre-money

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valuation he paid for this company was for bubbies secret sauce formula. they

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call that the intellectual property or IP of the company. that's where all the

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value is at this moment. in a pinch Reid hopes that while he could sell it to one

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of the Thousand Islands or Paul Newman or the good folks at Pace. proudly not

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from New York City. at this point Artie officially becomes the CFO and CEO of

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the company. in a tiny company that's common practice but in anything larger

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it's a big no-no. well Reid is looking over their shoulders anyway and he [man folds arms]

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explains the balance sheet equation as ale. yeah kind of like the stuff you

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drink. assets minus liabilities equals equity. $500,000 in assets which is cash

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minus zero dollars in liabilities is $500,000 in equity. confused a bit? all

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right let's break this down assets the barbecues- the knowledge how to make the

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distinctively semi spicy sauce derived from oil schmaltz and secret recipes. the

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brand name, the sauce and well, Bubbie. in more pedantic terms add accounts [top secret file shown]

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receivable investments inventory and property both intellectual and physical,

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all that, assets. liabilities well right now we have

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none. think of liabilities as what do we owe? as the sauce company gets bigger

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it'll start buying a lot of raw materials to make the stuff and it'll

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have agreements with those suppliers to you know pay them later for the onions

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thank you very much. those are called accounts payable. the company might also

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raise additional money on a long term basis by borrowing it. and that borrowing

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would also be considered a liability. now in theory the preferred shares at Book

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value or what they were written down at the book out of five hundred thousand [book value defined]

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dollars would be a liability but preferred shares are actually equity.

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they convert into common when things go well. and there's no liability on the

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company to pay back the five hundred thousand dollars of cash from its

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operations. this is kind of a venture capital flavor of preferred stock

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different from other types of preferred usually found in public companies. well

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don't worry about all that stuff yet what you do have to know is that book

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value is what common shareholders would get if the company just died and put

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itself on eBay, less the bloated listing fees on eBay. they get a net [head stone pictured]

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number whatever the company sold for well preferred shareholders would get

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first and whatever is left that would go to the common shareholders. remember more

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or less that this number ale assets minus liabilities equals equity. okay? got

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it? so that's the equity of the company comes from assets minus liabilities. Book

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value is not an assessment of the selling price of the original

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handwritten copy of Moby Dick .instead book value usually gets brought into

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question for market valuations sake when things have gone horribly wrong and

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there really isn't an ongoing enterprise anymore for the business. not a good

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thing for investors most of the time, meaning people look at Book value or how

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much money the company raised as at least an initial guess for what it's

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worth like the cash they raise they bought a bunch of barbecues what do they

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work now? oh and don't forget equity. that's the amount of value you have in

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asset after subtracting any debts. so as you can see there's a lot more that goes

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into the sauce business than meets the eye ,or the mouth. there's the matter of [sauce simmering]

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your assets liabilities and overall equity but let's not forget the super

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secret sauce recipe Ardie Bernie's grandma is going to get really

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angry about them stealing. [man looks fearful]

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