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 adjusts the financial statements to reflect normal business operations. This could inflate revenues and mislead Company A about the actual earnings potential of Company B.
Step 2
B. capitalise their research and development expenses.
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If Company B capitalises their R&D expenses, it means they treat these costs as assets rather than expenses. This can lead to a higher asset base on the balance sheet and inflate Company B's value, making it seem more profitable than it truly is.
Step 3
C. fully disclose the nature of the receivables owed to the company.
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Fully disclosing receivables is a transparent practice that provides accurate information to Company A about potential risks and the collectability of those receivables. This would not lead to overvaluation.
Step 4
D. record their buildings at historical cost although they increased in value.
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Recording buildings at historical cost reflects the true purchase price and does not artificially inflate the asset values on Company B's balance sheet. This practice is conservative and prevents overvaluation.
