Company A intends to buy Company B - HSC - SSCE Business Studies - Question 20 - 2021 - Paper 1
Question 20
Company A intends to buy Company B. Company A might pay too much for Company B if Company B's financial manager decides to
A. normalise a large one-off asset sale.
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Worked Solution & Example Answer:Company A intends to buy Company B - HSC - SSCE Business Studies - Question 20 - 2021 - Paper 1
Step 1
A. normalise a large one-off asset sale.
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Answer
Normalising a large one-off asset sale could potentially inflate the financial figures. However, this would help in presenting a more accurate ongoing performance of Company B.
Step 2
B. capitalise their research and development expenses.
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Capitalising research and development expenses causes the balance sheet to show higher asset values, artificially inflating profits in the short term. This might mislead Company A about the true financial health of Company B.
Step 3
C. fully disclose the nature of the receivables owed to the company.
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Full disclosure of receivables would provide transparency and is unlikely to mislead Company A. Hence, this action does not pose a risk of overpayment.
Step 4
D. record their buildings at historical cost although they increased in value.
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Recording buildings at historical cost undervalues Company B's assets on the balance sheet, potentially misleading Company A regarding the true worth of Company B's real estate.
