Question 1

A merger between a supplier and a customer is a(n):
A) friendly combination.
B) horizontal combination.
C) unfriendly combination.
D) vertical combination.

Accepted Answer

A merger between a supplier and a customer is considered a vertical combination because it involves companies at different stages of production or distribution in the same industry.

Question 2

Which of the following is not a component of other comprehensive income under GAAP?
A) earnings.
B) gains and losses that bypass earnings.
C) impairment losses.
D) accumulated other comprehensive income.

Accepted Answer

D

Question 3

Many of FASB's recent pronouncements indicate a shift away from historical cost accounting toward:
A) an elevated status for the Statements of Financial Accounting Concepts.
B) convergence of standards.
C) fair value accounting.
D) representationally faithful reporting.

Accepted Answer

Many of FASB's recent pronouncements have indeed indicated a shift towards fair value accounting, which involves assessing assets and liabilities at their current market value, rather than their historical cost. This approach is believed to provide more accurate and timely information to users of financial statements.

Question 4

Estimated goodwill is determined by computing the present value of the:
A) average earnings.
B) excess earnings.
C) expected future earnings.
D) normal earnings.

Accepted Answer

Goodwill is often calculated by determining the present value of excess earnings, which are the earnings above the normal expected return on assets.

Question 5

The impairment standard as it relates to goodwill is an example of a:
A) consumption of benefit approach.
B) loss or lack of benefit approach.
C) component of other comprehensive income.
D) direct matching of expenses to revenues.

Accepted Answer

The impairment standard related to goodwill is an example of a loss or lack of benefit approach. This approach recognizes that the value of goodwill on the balance sheet may decrease (impaired) if the anticipated future benefits that justified the goodwill amount are no longer expected to be realized.

Question 6

Stock given as consideration for a business combination is valued at:
A) fair market value
B) par value
C) historical cost
D) None of these

Accepted Answer

Stock given as consideration for a business combination is valued at its fair market value at the time of the transaction. This approach reflects the current value of the stock exchanged for the acquisition, providing a more accurate representation of the transaction's cost.

Question 7

The defense tactic that involves purchasing shares held by the would-be acquiring company at a price substantially in excess of their fair value is called:
A) poison pill.
B) pac-man defense.
C) greenmail.
D) white knight.

Accepted Answer

Greenmail is a strategy used by a target company to prevent a hostile takeover by purchasing the shares held by the would-be acquiring company at a premium. This effectively buys off the potential acquirer.

Question 8

Which of the following statements is correct?
A) Total elimination is consistent with the parent company concept.
B) Partial elimination is consistent with the economic unit concept.
C) Past accounting standards required the total elimination of unrealized intercompany profit in assets acquired from affiliated companies.
D) none of these.

Accepted Answer

Past accounting standards required the total elimination of unrealized intercompany profit in assets acquired from affiliated companies to ensure that financial statements reflect only realized profits.

Question 9

The third period of business combinations started after World War II and is called:
A) horizontal integration.
B) merger mania.
C) operating integration.
D) vertical integration.

Accepted Answer

The third period of business combinations, starting after World War II, is often referred to as "merger mania" due to the significant increase in corporate mergers and acquisitions during this time.

Question 10

Under the parent company concept, consolidated net income __________ the consolidated net income under the economic unit concept.
A) is the same as
B) is higher than
C) is lower than
D) can be higher or lower than

Accepted Answer

Under the parent company concept, consolidated net income is the same as under the economic unit concept because both concepts ultimately aim to present the financial performance of the parent and its subsidiaries as a single economic entity, despite differences in their theoretical approaches to consolidation.

Question 11

Which of the following statements would not be a valid or logical reason for entering into a business combination?
A) to increase market share.
B) to avoid becoming a takeover target.
C) to reduce risk by acquiring established product lines.
D) the operating costs of the combined entity would be more than the sum of the separate entities.

Accepted Answer

The goal of a business combination is often to achieve synergies that result in lower overall operating costs, increased efficiency, or enhanced market power. If the operating costs of the combined entity would be more than the sum of the separate entities, it contradicts the typical financial objectives of mergers and acquisitions, making it an invalid reason for pursuing a business combination.

Question 12

The excess of the amount offered in an acquisition over the prior stock price of the acquired firm is the:
A) bonus.
B) goodwill.
C) implied offering price.
D) takeover premium.

Accepted Answer

The excess of the amount offered in an acquisition over the prior stock price of the acquired firm is known as the takeover premium. This premium is paid by the acquiring company to obtain control of the target company.

Question 13

A firm can use which method of financing for an acquisition structured as either an asset or stock acquisition?
A) Cash
B) Issuing Debt
C) Issuing Stock
D) All of these

Accepted Answer

A firm can use cash, issue debt, or issue stock to finance an acquisition, regardless of whether it is structured as an asset or stock acquisition.

Question 14

The difference between normal earnings and expected future earnings is:
A) average earnings.
B) excess earnings.
C) ordinary earnings.
D) target earnings.

Accepted Answer

The difference between normal earnings and expected future earnings is referred to as excess earnings. This concept is often used in business valuation, where the value of a company is determined by its ability to generate earnings above a certain "normal" or expected level.

Question 15

The first step in estimating goodwill in the excess earnings approach is to:
A) determine normal earnings.
B) identify a normal rate of return for similar firms.
C) compute excess earnings.
D) estimate expected future earnings.

Accepted Answer

Identifying a normal rate of return for similar firms is the first step in the excess earnings approach to estimating goodwill. This rate is used to calculate the expected return on the tangible assets of the firm, which is then subtracted from the firm's total expected earnings to determine the excess earnings attributable to goodwill.

Question 16

The objectives of FASB 141R (Business Combinations) and FASB 160 (Noncontrolling Interests in Consolidated Financial Statements) are as follows:
A) to improve the relevance, comparability, and transparency of financial information related to business combinations.
B) to eliminate the amortization of Goodwill.
C) to facilitate the convergence project of the FASB and the International Accounting Standards Board.
D) to improve the relevance, comparability, and transparency of financial information related to business combinations and to eliminate the amortization of Goodwill.

Accepted Answer

The answer of The objectives of FASB 141R (Business Combinations)...

Question 17

When a new corporation is formed to acquire two or more other corporations and the acquired corporations cease to exist as separate legal entities, the result is a statutory:
A) acquisition.
B) combination.
C) consolidation.
D) merger.

Accepted Answer

In a statutory consolidation, a new corporation is formed to acquire two or more other corporations, and the acquired corporations cease to exist as separate legal entities. This process combines all companies into a completely new entity.

Question 18

The parent company concept of consolidation represents the view that the primary purpose of consolidated financial statements is:
A) to provide information relevant to the controlling stockholders.
B) to represent the view that the affiliated companies are a separate, identifiable economic entity.
C) to emphasis control of the whole by a single management.
D) to include only a portion of the subsidiary's assets, liabilities, revenues, expenses, gains, and losses.

Accepted Answer

The parent company concept of consolidation focuses on providing information that is relevant to the controlling stockholders, emphasizing the perspective and interests of the parent company's shareholders.

Question 19

A business combination in which the boards of directors of the potential combining companies negotiate mutually agreeable terms is a(n):
A) agreeable combination.
B) friendly combination.
C) hostile combination.
D) unfriendly combination.

Accepted Answer

A business combination where the boards of directors of the companies involved negotiate mutually agreeable terms is known as a friendly combination. This contrasts with a hostile combination, where one company attempts to take over another without the agreement or cooperation of the target company's board.

Question 20

Which of the following situations best describes a business combination to be accounted for as a statutory merger?
A) Both companies in a combination continue to operate as separate, but related, legal entities.
B) Only one of the combining companies survives and the other loses its separate identity.
C) Two companies combine to form a new third company, and the original two companies are dissolved.
D) One company transfers assets to another company it has created.

Accepted Answer

In a statutory merger, one of the combining companies survives while the other loses its separate legal identity. This is characteristic of option B, where only one company remains after the merger, and the other is absorbed and ceases to exist as a separate entity.

Quiz 1: Introduction to Business Combinations and the Conceptual Framework

A merger between a supplier and a customer is a(n) :

Which of the following is not a component of other comprehensive income under GAAP?

Many of FASB's recent pronouncements indicate a shift away from historical cost accounting toward:

Estimated goodwill is determined by computing the present value of the:

The impairment standard as it relates to goodwill is an example of a:

Stock given as consideration for a business combination is valued at:

The defense tactic that involves purchasing shares held by the would-be acquiring company at a price substantially in excess of their fair value is called:

Which of the following statements is correct?

The third period of business combinations started after World War II and is called:

Under the parent company concept, consolidated net income __________ the consolidated net income under the economic unit concept.

Which of the following statements would not be a valid or logical reason for entering into a business combination?

The excess of the amount offered in an acquisition over the prior stock price of the acquired firm is the:

A firm can use which method of financing for an acquisition structured as either an asset or stock acquisition?

The difference between normal earnings and expected future earnings is:

The first step in estimating goodwill in the excess earnings approach is to:

The objectives of FASB 141R (Business Combinations) and FASB 160 (Noncontrolling Interests in Consolidated Financial Statements) are as follows:

When a new corporation is formed to acquire two or more other corporations and the acquired corporations cease to exist as separate legal entities, the result is a statutory:

The parent company concept of consolidation represents the view that the primary purpose of consolidated financial statements is:

A business combination in which the boards of directors of the potential combining companies negotiate mutually agreeable terms is a(n) :

Which of the following situations best describes a business combination to be accounted for as a statutory merger?