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The application for the 2024-2025 F.I.R.E. (Forging Interest in Research and Engagement) Starters program is now open to Virginia Tech undergraduates (specifically, rising sophomores and/or students with junior standing, or students with at least 2 years remaining at Virginia Tech).  

As a global land-grant institution, Virginia Tech is committed to serving individuals and society and improving the quality of life for all. The realization of this vision rests on our ability to advance transdisciplinary research that is informed by a diverse array of lived experiences. The purpose of the F.I.R.E. Starters program is to:

  1. increase diversity in undergraduate research at Virginia Tech,
  2. increase access to foundational research training,
  3. connect students with faculty research mentors, and
  4. prepare students for independent and collaborative research, competitive summer research opportunities, and other undergraduate research experiences.

Students in all disciplines – especially in the humanities and social sciences – are encouraged to apply.

The deadline for applications is April 15, 2024

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Our new paper entitled “Systematic investigation of inadequate food access at a large southeastern land grant university,” is now available at PLOS ONE.

Abtract: Over the past decade, the impact of low food security on student well-being and academic performance has become a growing concern at institutions of higher education across the U.S. This mixed methods study adds to the growing body of evidence on the association between student socio-demographic and economic characteristics and food security. An online survey covering food access, student well-being, and housing security was sent to 35,337 undergraduate and graduate students at a large southeastern land grant university. A total of 2,116 complete responses were received; a 6% response rate. The survey responses also included 176 written statements by students. The survey found that 16% of both undergraduate and graduate students had low or very low food security, as defined by a modified USDA food security measure. The socio-demographic and economic characteristics that were linked to a higher likelihood of low food security included: having a GPA of less than 3.0, having a disability, being an international student, being a first-generation student, being a transfer student, going into debt to pay for food, being a Black or African American student, having poor mental health, having uncertain living arrangements, and having no medical insurance. Recommendations for enhancing student access to food, housing, and mental health services are discussed.

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Developing a thorough business or product strategy takes time, but doing so is essential to creating a winning team vision. Planning how to transform your product ideas into workable solutions that clients adore requires careful consideration of some crucial factors. Templates for strategic planning facilitate and organize this process. Business executives and product managers frequently utilize SWOT analysis examples to...
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The concept of book value and market value are very different in nature even though they both attempt to estimate how much an asset or a business is worth.

These concepts approach valuations from different perspectives as the book value uses historical information to determine the value of the asset while the market value assesses how much the market would be willing to pay for it.

Throughout the following article we will outline the most important differences between both concepts and how they are usually applied and used in the business world.

What is Book Value?

The book value of an asset reflects how much the asset is worth based on the price paid for the asset back when it was purchased minus any accumulated depreciation. On the other hand, this concept also refers to the value of a company’s Shareholder’s Equity as measured by accounting records.

The book value doesn’t necessarily reflect how much an asset is worth if it were to be sold as it only takes into account the historical value of it. If the asset is sold at a price higher than its book value, the organization would register a process as a result of the transaction and the opposite is also true if the asset is sold at a price lower than its book value, as in that case a loss would be registered.

What is Market Value?

The market value of an asset is an estimation of how much a willing buyer would pay for the asset as is. This approximation is based on available market information such as the price recently paid for other similar assets and it is a more reliable measure of an asset’s worth compared to its book value.

From an accounting perspective, the market value of an asset can’t always be reflected on the company’s books, especially when it comes to fixed assets, as certain accounting principles prevent that companies continually revalue their assets.

Key Takeaways

Fundamental Differences: Book value is determined based on the company’s financial statements, reflecting the net asset value, whereas market value is influenced by external market forces and represents the current share price or the value investors assign to a company.

Indicator of Performance and Perception: While book value offers insight into the company’s tangible asset value, market value is a gauge of investor perception, market trends, and future earnings potential, often serving as an indicator of how the market views the company’s growth prospects.

Valuation and Investment Strategy: The comparison between book value and market value can help investors identify potential investment opportunities; stocks trading below their book value may be considered undervalued, while those with high market values compared to book value might be seen as having strong growth prospects or potentially overvalued.

Key Differences Between Book Value and Market Value

What do Each Measure?

The book value of an asset or a business measures how much they are worth purely based on accounting records. This means that individual assets will be valued based on their historical price minus any accumulated depreciation and the same goes for the company’s debt.

The market value, on the other hand, measures how much a buyer would be willing to pay for the asset or the business in its current state and both values can be considerably different under certain circumstances.

What is the bases for each measurement – historical cost vs trending FMV of the asset

The first step to calculate the book value of an asset is to determine how much it cost to purchase it. This not only includes the price paid for the asset, but also any other expenses associated with its installation and transportation to the place where it is supposed to be used.

After that, accountants have to estimate the useful life of each asset based on certain guidelines and they also have to determine if the asset will be assigned with a residual value.

Finally, as time passes, the book value of the asset will be progressively diminished by depreciation charges applied to it and the book value can be calculated at any given point in time simply by deducting the accumulated depreciation minus the historical cost of the asset.

From the perspective of an entire business, on the other hand, the book value of a company can be estimated as its total assets minus its total liabilities.

The market value on the other hand cannot be calculated. Instead, it is determined by using primary and secondary sources of information such as quotations from the supplier of the asset or by researching any recent transaction involving a similar asset to use the price paid on that operation as a reference.

When it comes to a publicly traded business, the market value of its equity is determine by market forces and it is updated by the minute on the exchange that the business shares are traded.

Frequency of Valuation Fluctuations

The book value of an asset rarely fluctuates as it usually remains unchanged within the company’s books. On the other hand, there are certain instances in which the book value of an asset can be revalued based on extreme changes in market conditions or changes in the asset itself.

The book value of a business as a whole will probably fluctuate over time depending on whether the business is generating profits or losses or if new capital is invested on it.

In contrast, the market value of an asset or a business can fluctuate significantly even during a short period of time, as this value is determined based by market forces. It can be concluded, then, that market values are considerably more volatile than book values.

what-is-the-difference-book-value-vs-market-value

Book Value and Market Value Examples

United Logistics is a company that operates various warehouses and it provides order fulfillment services to e-commerce businesses based in the United States and abroad. The company’s most important assets are transportation vehicles, warehouse equipment, and automated machinery that helps them in fulfilling each order received in record time.

The company is currently looking to sell some old forklifts to renew the fleet and the CEO of the business approached the accounting department to determine how much he could sell them for.

Each forklift cost $18,000 and they were assigned with 4 years of useful life each. Additionally, no residual value was recorded for the forklifts, which means that the annual depreciation charge would be $4,500.

These forklifts have 3 years of age and based on the information given by the accounting department their current book value is $4,500 ($18,000 – ($4,500 * 3)).

On the other hand, after approaching some intermediaries the CEO found that these forklifts could be sold for $3,800 as the market for used forklifts doesn’t have that much demand.

In this case, the book value of the forklifts ($4,500) is different than its market value ($3,800).

Bottom Line

The book value and market value of an asset or a business can vary significantly and they are not necessarily related as the former is determined by using historical costs while the latter is determine by market forces based on the dynamics of supply and demand.

Frequently Asked Questions

What distinguishes book value from market value in financial analysis?

Book value represents the net asset value of a company according to its balance sheet, while market value reflects what investors are currently willing to pay for its shares or assets in the open market, often influenced by future growth prospects and market perceptions.

How can a company’s book value differ significantly from its market value?

A significant difference can arise due to factors such as investor sentiment, market conditions, and future earnings potential, where market value may greatly exceed book value in the case of high investor confidence and growth expectations, or fall below book value if the company is perceived to be in decline.

Why might investors consider both book value and market value when evaluating a stock?

Considering both values allows investors to assess a company’s underlying asset value compared to its valuation in the investor community, providing insights into potential overvaluation or undervaluation based on current market dynamics and fundamentals.

Can the book value of a company change over time, and how does this affect market value?

Yes, the book value can change due to factors like asset depreciation or acquisition, affecting the company’s net asset value; however, market value may not directly correlate with these changes and is more influenced by investor expectations and market trends.

The post Book Value vs Market Value appeared first on My Accounting Course.

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What is the Beneish M-Score?

Definition: The Beneish M-Score is a mathematical model created at the end of the 20th Century by Professor Messod Beneish to identify if a company has manipulated its earnings. The model includes eight financial ratios constructed with data taken from the company’s financial statements and weighted by coefficients.

Investors and financial analysts who want to identify potential manipulations of financial results are the main users of the Beneish M-Score.

In short, it is used as a fraud detection technique. Since the financial results are the key input to decide whether or not to favor a potential investment, senior managers are strongly tempted to apply accounting policies as a way to artificially inflate short-term profits.

The result of the M-Score is a number that indicates the degree to which the earnings have been manipulated. According to Beneish, companies tend to manipulate profits if they have high sales growth, deteriorating gross margins, rising operating expenses, and rising leverage.

They are likely to manipulate profits by accelerating sales recognition, increasing cost deferrals, raising accruals, and reducing depreciation.

Key Takeaways

Earnings Manipulation Indicator: The Beneish M-Score is a sophisticated tool designed to identify the likelihood of a company manipulating its reported earnings, using a formula that analyzes various financial ratios and indicators.

Threshold for Concern: A score higher than -2.22 typically indicates a higher probability of earnings manipulation, signaling investors and analysts to exercise caution and conduct further investigation into the company’s financial practices.

Sector Sensitivity: The effectiveness and interpretation of the Beneish M-Score can vary by industry, as different sectors may have inherent characteristics that influence the score, necessitating a nuanced approach to its application and analysis.

Beneish M-Score Formula

The M-Score is calculated through the following formula:

M-score = -4.840 + 0.920 * DSRI + 0.528 * GMI + 0.404 * AQ + 0.892 * SGI + 0.115 * DEPI – 0.172 * SGAI – 0.327 * LVGI + 4.697 * TATA

Where

Components of the Beneish M-Score Formula

DSRI = Day Sales Receivable Index. It measures the ratio of days’ sales in receivables versus prior year. When Days Receivable increase notably, it might indicate accelerated income recognition to inflate earnings.

GMI = Gross Margin Index. It is calculated as the ratio of gross margin versus prior year. When gross margin is decreasing the firm is incentivized to inflate profits as a way to avoid worrying signals to investors.

AQ = Asset Quality Index. This is estimated as the ratio of non-current assets to total assets, but excluding from non-current assets the business’ plants, properties and equipment. This ratio measures asset quality compared to the previous year. An increase in long term assets other than property plant and equipment, relative to total assets indicates that a firm has potentially increased its involvement in cost deferral to inflate profits.

SGI = Sales Growth Index. This calculates sales growth versus previous year figure. Although high sales growth is not and indication of manipulation itself, the model assumes that high growth companies are more probable to commit financial fraud. This happens because their capital needs put pressure on managers to achieve good financial results.

DEPI = Depreciation Index. This calculates the ratio of the rate of depreciation versus previous year. A falling level of depreciation relative to net fixed assets raises the possibility that a firm has increased the useful life of its assets above the recommended standard, or adopted a new method of estimating their depreciation estimations to increase profits.

SGAI = Selling, General and Administrative Expenses Index. This measures the ratio of SGA expenses compared to the previous year. When there is a large increase in SG&A relative to sales, companies have higher incentives to inflate profits as a way to avoid negative signals.

LVGI = Leverage Index. This calculates the ratio of total debt to total assets versus the previous year. Leverage is seen as total debt relative to total assets. When leverage is rising, managers have incentives to manipulate profits to maintain the image that the business is solvent.

TATA = Total Accruals to Total Assets. This metric assesses the extent to which managers make discretionary accounting choices to alter earnings. Total accruals are calculated as the change in working capital (other than cash) less depreciation relative to total assets. Accruals, or a portion thereof, reflect the extent to which managers make discretionary accounting choices to alter earnings.

Four of the elements measure earnings manipulation (DSR, AQI, DEPI and TATA) and the remaining four indicate a predisposition to engage in earnings manipulation (GMI, SGI, SGAI, LEVI).

The Beneish M-Score says that when a company obtains a score greater than -2.22, which means that it may be a less negative or a positive number, it is more likely that it may be manipulating its accounting to inflate earnings.

what-is-the-beneish-m-score

Beneish M-Score Example

Let’s analyze two hypothetical companies to apply the Beneish M-Score formula.

Company A has the following financial ratios.

DSRI = 1.6

GMI = 1.1

AQ = 0.99

SGI = 0.7

DEPI = 1.02

SGAI = 1.15

LVGI = 0.5

TATA = -1

M-score = -4.840 + 0.920 * 1.6 + 0.528 * 1.1 + 0.404 * 0.99 + 0.892 * 0.7 + 0.115 * 1.02 – 0.172 * 1.15 – 0.327 * 0.5 + 4.697 * -1 = -6.7

The result indicates that Company A has not manipulated its earnings, as the number is lower than -2.22

Company B has the following financial ratios.

DSRI = 2

GMI = 2.2

AQ = 0.98

SGI = 0.7

DEPI = 1.02

SGAI = 0.2

LVGI = 0.1

TATA = -0.1

M-score = -4.840 + 0.920 * 2 + 0.528 * 2.2 + 0.404 * 0.98 + 0.892 * 0.7 + 0.115 * 1.02 – 0.172 * 0.2 – 0.327 * 0.1 + 4.697 * -0.1 = -1.24

For Company B, the Beneish M-Score indicates that earnings have probably been manipulated, as the number is higher than -2.22

How to Interpret the Beneish M-Score Analysis

The Beneish M-Score states that a company with a result higher -2.22 is more likely to be engaged in the manipulation of its reported earnings. On the opposite side, a company with a result under -2.22 is more likely to be transparently reporting its results.

To test the model, Professor Beneish used all companies in the Compustat database between 1982 and 1992. After running the test, the results were good yet not perfect.

The model could rightly find 76% of the manipulators and wrongly identified 17.5% of non-manipulators. Students of Cornell University applied the model to Enron and correctly identified that corporation as a manipulator.

Cautions & Limitations

Due to the risk of being wrong, the Beneish M-Score should be used as a mere approximation to detect potential earnings manipulation. It is certainly useful but an investor should not make a final decision on an investment by only using this method.

More thorough analysis of the company’s books should serve as a complement to any definitive conclusion. In the example shown above, an analyst should look carefully at Company B to evaluate if the business is actually a good investment alternative, considering it may be engaged in this sort of manipulation.

Frequently Asked Questions

What is the Beneish M-Score and how is it used?

The Beneish M-Score is a mathematical model that uses eight financial ratios to identify the likelihood of a company manipulating its earnings. It serves as a tool for investors and analysts to assess the risk of earnings manipulation, with a score higher than -2.22 suggesting a high probability of manipulation.

Can the Beneish M-Score predict financial fraud in companies?

While the Beneish M-Score is designed to detect signs of earnings manipulation, it’s not foolproof in predicting financial fraud but significantly aids in raising red flags for further investigation, based on statistical analysis of accounting data.

How does the Beneish M-Score differ from traditional financial analysis?

The Beneish M-Score specifically targets the detection of earnings manipulation by examining changes in key financial ratios over time, unlike traditional financial analysis that might focus more broadly on evaluating financial health, performance, and future prospects of a company.

Is the Beneish M-Score applicable to all types of companies?

The Beneish M-Score is most effective with publicly traded companies due to the availability of detailed financial information required for its calculation; however, its applicability and accuracy can vary across different industries and sizes of companies, with some sectors potentially having naturally higher scores without engaging in manipulation.

The post Beneish M-Score appeared first on My Accounting Course.