The balance-sheet does not show the market value of the business. For example, the assets, particular the long term assets are normally shown at cost or revaluation at a point in time, they do not show the current market value of those assets.
Items such as intangibles, for example the value of the knowledge and skills of employees, are not reflected in the balance sheet position.
The Need to Understand the Statement of Financial Position
Most businesses tend to concentrate on the income statement and fail to get to grips with the statement of financial position.
The basic balance sheet is important for many reasons:
Management should use the financial statement to help identify whether the need for working capital (inventory plus accounts receivable less accounts payable) is growing, and how that need is being funded (equity, overdraft, loans etc).
Suppliers use the statement of financial position to identify the net assets and cash position of the business to decide whether to supply on credit terms.
Bank managers utilise the statement, as they base their lending ratios on certain aspects of it, for example the current ratio = current assets / current liabilities is used to determine liquidity and the risk of non repayment of a debt.
Investors use the balance sheet to decide whether to invest or not and at what price. For example they will look at the debt / equity ratio to determine the level of risk involved.
Any number of people could be using your statement of financial position to make decisions about your business. It is important that you have an understanding of what information the balance-sheet position is providing and what that information is telling you.