What happens to the financial statements when you purchase another company for $1000 in cash - creating $400 in goodwill and $100 in intangibles and the other company has $500 in shareholder's equity?
I got this question on one of the BIWS guides.
I know that there isn't any impact on the IS. If there is a cash reduction on CFS, does this mean that you add $100 of intangibles, $400 of goodwill, and reduce SHE by $500 to balance on BS?
Another potential approach I would take is:
no impact on IS, CFI decreases by 1000, CFF increases by 500 on CFS
On BS: -500 for cash, +100 for intangibles, +400 for goodwill
Any help is appreciated!
This question is from the guide, but it didn't mention anything about how the financial statements are affected by the initial acquisition.
I preface with, I am not 100% confident.
But there is a -1000 in the CFI and that is the only cash change.
That cash flows to the cash line of the balance sheet (-1000). However, you add 400 in goodwill, 100 in intangible assets, and 500 in new assets from the new company. The goodwill and intangible assets are capturing the premium that you paid over the shareholders equity for the other company.
Shareholders equity formula can be rewritten as SE= Assets - Liabilities.... so your net asset value is 500 and you are paying 1000. Thus, goodwill should be 500 but i guess they just seperated 100 out to intangible assets. But regardless, you now have 500 of new assets from taking over the other company. So assets side of BS ends up cancelling out.
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