Question

What is the difference between book value and market value? Which should we use for decision-making purposes?

Answer 1

Book value is the value of an asset as shown on a firm's balance sheet. It represents the historical cost of an asset rather than its current worth.

The market value of an asset is the observed value for the asset in the market place. This value is determined by supply and demand forces working together in the market place, where buyers and sellers negotiate a mutually acceptable price for the asset.

The market value should be used for all decision making purposes as it represent the current worth of an asset.