Analyzing Financial Statements L09 14 s t e economic entity

Analyzing Financial Statements L09) 14, s t e economic entity or the parent concept more consistent 1 What effect does each of the three items have on the reported net with the principles addressed in the FASB\'s conceptual income of the acquired company before the acquisition and orn framework? Explain your answer. the reported net income of the combined company in the first year of the acquisition and future years? O9 15. How does the FASB\'s conceptual framework influence the development of new standards? 2. What effect does each of the three items have on the cash from LO 9 16. What is the difference between net income, or earnings, and operations of the acquired company before the acquisition and comprehensive income? on the cash from operations of the combined company in the first year of the acquisition and future years? respond to these suggestions? provided by GAAP but would be regarded by many as pushing 3. If you are the manager of the acquired company, how do you Business Ethics From 1999 to 2001, Tyco\'s revenue grew approximately 24% and it acquired over 700 companies. It was widely rumored that Tyco 4. Assume that all three items can be executives aggressively managed the performance of the compa nies that they acquired by suggesting that before the acquisition, they should accelerate the payment of liabilities, delay recording position as the collections of revenue, and increase the estimated amounts in managed within the - mits of GAAP. Is there an ethical issue? Describe your : (A) an accountant for the target company and (B) as the li reserve accounts. ANALYZING FINANCIAL STATEMENTS

Solution

The effect that the three items will have on the net income shall be:

Accelerate payment of Liabilities: It is really a good decision for the acquiring company to takeover such a company whose all liabilities have been paid. If the target company has long outstanding liabilities at the time of takeover it can cause a destruction to the acquiring company which shall end up taking over and paying their liabilities and ending up reserves. In the year before acquisition the liabilities of acquired company shall be settled hence, showing their financials at a good position indicating a good current ratio also. In the combined financial statements, the liabilities will be reduced as the acquirer company does not a an obligation to discharge others dues. In future, there will be no claims from any of the acquired company\'s creditor\'s as they were discharged early. Hence, it will result in increase in Net Income for both companies.

Delay recording collections of revenue: such case will cause increase in debtors of the company before acquisition. This will altogether depict a completely stable company with all liabilities paid off and lots of debtors o/s. Also, this may also indicate that lots of bad debts are on th way as the financials will depict. After acquisition, as seen in the case before all liabilities are settled and delay in collection of revenue shown, hence, here assets acquired are more than liabilities, hence resulting in capital reserves for the acquiring company. In future, these generated reserves can be used to issue bonus shares. It will result in decrease in Net Income for target co. & increase for acquiring company.

Increase Estimated amount in reserve accounts: These will be nothing but excess reserves. The acquiring company will show excess reserves before acquisition of business. hence, resulting in a good capital gearing ratio. After acquisition, the combined company can use these reserves for multiple purposes such as to set off their losses, issue share capital, give loan, pay dividend etc. In future, the company may have higher EPS. Hence increasing the growth of combined entity. It will result in increase in Net Income for both companies.