You Are Analyzing the Financial Statements of Floyd Corp

question 34

Essay

You are analyzing the financial statements of Floyd Corp. Floyd has made several acquisitions in the past few years using newly issued stock. These acquisitions have all been accounted for using purchase accounting. In each case, the purchase price exceeded the book value and fair value of the net assets of the acquired company. The book value and fair value of debt of acquired companies were the same. Floyd uses FIFO for inventory valuation purposes.
a. Explain why Floyd's acquisition history makes it difficult to analyze the trend of its financial results.
b. For each of the following measures, state the effect (higher, lower or no effect) on financial statement using the purchase method compared with the pooling method.
i. Gross Profit Margin Percentage
ii. Long-term debt-to-equity ratio
iii. Pretax earnings

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Definitions:

Parasympathetic

The part of the autonomic nervous system responsible for relaxation and conservation of energy.

Sympathetic

Part of the autonomic nervous system that prepares the body for action in challenging or threatening situations.

Parasympathetic

Part of the autonomic nervous system responsible for the body's rest and digest response, counteracting the fight or flight system.

Aroused

A state of heightened physiological and psychological activity, including alertness and emotional engagement.