CFA Practice Question

There are 334 practice questions for this study session.

CFA Practice Question

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?

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.
Correct Answer: I only

II is incorrect because if the fair market value of the acquired firm's net assets exceeds its book value, the acquisition method will require the acquiring firm to restate the acquired firm's assets to a higher value. These higher asset values will result in higher future depreciation and amortization expenses and thus lower earnings than had the pooling method been used.

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!
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