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Basic Question 13 of 20
Which of the following statements is (are) true with respect to the effects of the various business combination accounting methods will have on the income statement?
II. Assuming that the fair market value of the acquired firm's net assets exceeds its book value, the acquisition method will result in higher future earnings than the pooling method.
I. The acquisition method, as per the U.S. GAAP version, distorts the growth in sales figure when comparing pre and post merger income statements.
II. Assuming that the fair market value of the acquired firm's net assets exceeds its book value, the acquisition method will result in higher future earnings than the pooling method.
User Contributed Comments 4
| User | Comment |
|---|---|
| VenkatB | Can someone explain this ? How/Why I is true? |
| polska333 | Sales increase because a new company's sales are added rather than grown internally |
| alai2008 | In the acquisition method financial statements are not restated for previous years, so if you compare a pre-merge statement and a post-merge statement you are not comparing apples to apples but following sales of a single company compared to sales of the combination. |
| vi2009 | thanks alai2003 .. yeah, and that is why they love to merged companies these days. .. makes the figures look good! |
Your review questions and global ranking system were so helpful.
Lina
Learning Outcome Statements
describe the classification, measurement, and disclosure under International Financial Reporting Standards (IFRS) for 1) investments in financial assets, 2) investments in associates, 3) joint ventures, 4) business combinations, and 5) special purpose and variable interest entities;
distinguish between IFRS and US GAAP in their classification, measurement, and disclosure of investments in financial assets, investments in associates, joint ventures, business combinations, and special purpose and variable interest entities;
analyze how different methods used to account for intercorporate investments affect financial statements and ratios.
CFA® 2025 Level II Curriculum, Volume 2, Module 10.