Realising Reserves

[dewdrop]

I often wondered from a practical point of view what value can be placed on a companys reserves. I have a feeling some people think of cash being set aside to meet the reserves but am i correct in thinking that if a company is experiencing problems it will use its cash first to pay creditors and then collect as much debtors as possible and reduce stocks so in the end the reserve figure in the balance sheet could be represented by unsold stock and uncollectable debtors..am i missing something.

 

[Timbo]

I often wondered from a practical point of view what value can be placed on a companys reserves. I have a feeling some people think of cash being set aside to meet the reserves but am i correct in thinking that if a company is experiencing problems it will use its cash first to pay creditors and then collect as much debtors as possible and reduce stocks so in the end the reserve figure in the balance sheet could be represented by unsold stock and uncollectable debtors..am i missing something.

The "reserve" item on a company balance sheet is a liability, not an asset. It is an amount of the companies gross assets that are effectively owed to the shareholders, but not paid out in dividend - usually in order to leave a safety buffer before it becomes insolvent.

The role that it can play if the balance sheet deteriorates is that it can be written down - meaning shareholders losing equity in the company.

 

[dewdrop]

Thanks Timbo. while i appreciate that reserves appear on the liability side of a balance sheet at theend of the day can they end up by being represented by unrealisable assets

 

[jack2009]

If assets are unrealisable then you should consider revaluing them to zero! if you do this then it will reduce your profit for the given period and this will affect your reserves.

 

[Timbo]

Thanks Timbo. while i appreciate that reserves appear on the liability side of a balance sheet at theend of the day can they end up by being represented by unrealisable assets

Maybe I wasn't clear.

The "reserves" don't "represent" anything, but the net asset value.

If the NAV goes to zero, reserves will be zero - all assets sold will leave nothing left in the company of value.

 

[dewdrop]

Thanks Timbo. Whaat prompted my query was all the reserves banks had and eventually when their debtors are written down so the level of reserves will drop accordingly. I suppose what i am trying to get at is the figure of reserves is only accurate provided the assets are valued correctly. usually when a company goes bust the stock is sold off for a pittance and difficulty is experienced in trying to collect debtors. thanks again