Financial Reporting and Controlling (FRC) Theory

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Marco Kofel

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Marco Kofel

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This flashcard set covers university-level financial reporting and controlling, focusing on business combinations, acquisition methods, and equity accounting. It explores how companies account for subsidiaries, investments, and goodwill, as well as the purposes and methods of reporting. Investors and financial analysts will find this set particularly useful for understanding the complexities of financial reporting in business acquisitions and consolidations.

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Utilisateurs

Langue

Anglais

Catégorie

Finances

Niveau

Université

Créé / Mis à jour

13.01.2021 / 13.01.2021

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Which of the following does not represent a primary motivation for business combinations?

Combinations are often a vehicle to accelerate growth and competitiveness.

Cost savings can be achieved through elimination of duplicate facilities and staff.

Synergies may be available through quick entry for new and existing products into markets.

Larger firms are less likely to fial.

Which of the following is the best theoretical justification for consolidated financial statements?

In form the companies are one entity; in substance they are separate.

In form the companies are seperate; in substance they are one entitiy.

In form and substance the companies are one entity.

In form an substance the companies are separate.

What is a statutory merger?

A merger approved by the Securities and Exchange Commission.

An acquisition involving the purchase of both stock and assets.

A takeover completed within one year of the initial tender offer.

A business combination in which only one company continues to exist as a legal entitiy.

FASB ASC 805, "Business Combinations," provides principles for allocating the fair value of an acquired business. When the collective fair values of the seperately identified assets acquired and liabilites assumed exceed the fair value of the consideraion transferred, the difference should be:

recognized as an ordinary gain from bargain purchase.

treated as negative goodwill to be amortized over the period benefited, not to exceed 40 years.

treated as goodwill and tested for impairment on an annual basis.

Applied pro rata to reduce, but not below zero, the amounts initially assigned to specific non-current assets of the acquired firm.

When does gain recognition accompany a business combination?

When a bargain purchase occcurs.

In a combination created in the middle of a fiscal year.

In an acquisition when the value of all assets and liabilities cannot be determined.

When the amount of a bargain purchase exceeds the value of the applicable noncurrent assets (other than certain exceptions) held by the acquired company.

According to the acquisition method of accounting for business combinations, costs paid to attorneys and accountants for services in arranging a merger should be

capitalized as part of the overall fair value acquired in the merger.

recorded as an expense in the period the merger takes place.

included in recognized goodwill.

written off over a ive-year maximum useful life.

When negotiating a business acquisition, buyers sometimes agree to pay extra amounts to sellers in the future if performance metrics are achieved over specified time horizons. How should buyers account for such ontingent consideration in recording an acquisition.

The amount ultimately paid under the contingent consideration agreement is added to goodwill when and if the performance metrics are met.

The fair value of the contingent consideration is expensed immediately at acquisition date.

The fair value of the contingent consideration is included in the overall fair value of the consideration transferred, and a liability or additional owners' equity is recognized.

The fair value of the contingent consideration is recorded as a reductino of the otherwise determinable fair value of the acquired firm.

An acquireed firm's financial records sometimes show goodwill from previous business combinations. How does a parent company account for the preexisting goodwill of its newly acquired subsidiary?

The parent tests the preexisting goodwill for impairment before recording the goodwill as part of the acquisition.

The parent includes the preexisting goodwill as an identified intangible asset acquired.

The parent ignores preexisting subsidiary goodwill and allocates the subsidiary's fair value among the separatel identifiable assets acquired and liabilites assumed.

Preexisting goodwill is excluded from the identifiable assets acquired unless the subsidiary can demonstrate its continuing value.

When an investor uses the equity method to accuont for investments in common stock, the investor's share of cash dividends from the investee should be recorded as

a deduction from the investor's share of the investee's profits.

dividend income

a deduction from the stockholders' equity account, Dividends to Stockholders.

a deduction from the investment account.

Which of the following does not indicate an inestor company's ability to significantly influence an investee?

Material intra-entity transactions.

The investor owns 30 percent of the investee but another owner holds the remaining 70 percent.

Interchange of personnel.

Technological dependency.

Hawkins Company has owned 10 percent of Larker, Inc., for the past several years. This ownership did not allow Hawkins to have significant influence over larker. Recently, Hawkins acquired an additional 30 percent of Larker and now will use the equity method. how will the investor report change?

A cumulative effect of an accounting hcange is shown in the current income statement.

A retrospective adjustment is made to restate all prior years presented using the equity method.

No change is recorded; the equity method is used from the date of the new acquisition.

Hawkins will report the change as a component of accumulated other comprehensive income.

When an equity method investment account is reduced to a zero balance

the investor should establish a negative investment account balance for any future loss reported by the investee.

the investor should discontinue using the equity method until the investee begins paying dividends.

future losses are reported as unusual items in the investor's income statement.

the investment retains a zero balance until subsequent investee profits eliminate all unrecognized losses.

A company acquires a subsidiary and will prepare consolidated financial statements for external reporting purposes. For internal reporting purposes, the company has decided to apply the initial value method. Why might the company have made this decision?

It is a relatively easy method to apply.

Operating results appearing on the parent's financial records reflect consolidated total.

GAAP now requires the use of this particular method for internal reporting purposes.

Consolidation is not required when the parent uses th initial value method.

A company acquires a subsidiary and will prepare consolidated financial statements for external reporting purposes. For internal reporting purposes, the company has decided to apply the equity method. Why might the company have made this decision?

It is a relatively easy method to apply.

Operating results appearing on the parent's financial records reflect consolidated totals.

GAAP now requires the use of this particular method for internal reporting purposes.

Consolidation is not required when the parent uses the equity method.

What is a basic premise of the acquisition method regarind accounting for a noncontrolling interest?

Consolidated financial statements should be primarily for the benefit of the parent company's stockholders.

Consolidated financial statements should be produced only if both the parent and the subsidiary are in the same baisc industry.

A subsidiary is an indivisible part of a business combination and should be included in its entirety regardless of the degree of ownership.

Consolidated financial statements should not report a noncontrolling interest balance because these outside owners do not hold sock in the parent company.

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