Seeing is believing!
Before you order, simply sign up for a free user account and in seconds you'll be experiencing the best in CFA exam preparation.
Basic Question 17 of 20
Octopus has recently acquired Guppy. Octopus needs to consolidate the financial statements of the two companies that were released recently.
B. lower than.
C. the same as.
The following things are disclosed:
- Octopus issued 20 million shares worth $250 million to pay for the acquisition.
- Guppy's fixed assets are actually worth $350 million at market prices.
- Guppy's current assets should be marked down by $10 million due to bad accounts which have not been fully covered, which the liabilities on Guppy's balance sheet are correctly valued.
- Octopus uses a 10-year straight line depreciation with no salvage value, while Guppy uses a 15-year straight line depreciation with no salvage value.
Under the acquisition method, the asset turnover ratio of the combined entity will be ______ that under the pooling of interests method.
A. higher than.
B. lower than.
C. the same as.
User Contributed Comments 5
| User | Comment |
|---|---|
| ssradja | you don't have to calculate anything here. just use some logic. asset turnover = sales/assets. assets under acquisition is higher, so asset turnover lower. |
| noonah | Assets under acquisition method usually higher because Fair (market) value of assets are usually higher than book value, and possiblity of goodwill. However, if the question indicates assets are marked down, then it is the other way round. |
| vi2009 | Acquisition method, we include goodwill as part of the assets. But pooling of method there is no goodwill (since it is b.v. to b.v.) overall as long as the net assets seem to be higher than prior period, there is no need for calculation for this question |
| quanttrader | basically pooled method always gives more favorable numbers, and that's why it is discontinued. |
| davidt876 | not necessarily quant. acquisition produces a better D/E ratio if for assets FV>BV and for liabilities FV<=BV ... because that would cause E to increase while D stayed the same or decreased: A=E+L although tbf that's literally the only favourable one i can think of |
I am happy to say that I passed! Your study notes certainly helped prepare me for what was the most difficult exam I had ever taken.
Andrea Schildbach
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.