Reading Financial Reports For Dummies
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Sometimes one company decides to buy another or merge with another. If a company acquires another company or merges during the year the annual report covers, a note to the financial statements is dedicated to the financial implications of that transaction. In this note, you see information about

  • The market value of the company purchased

  • The amount paid for the company

  • Any exchange of stock involved in the transaction

  • The transaction's impact on the bottom line

When a company acquires another company, it frequently pays more for that acquisition than for the total value of the purchased company's assets. The additional money spent to buy the firm falls into the line item called Goodwill.

Goodwill includes added value for customer base, brand name, locations, customer loyalty, and intangible factors that increase a business's value. If a company has goodwill built over the years from previous mergers or acquisitions, you see that indicated on the balance sheet as an asset.

In an acquisition, the acquired company's net income is added to the parent company's bottom line. This addition occurs even if the closing of the sale takes place at the end of the year. Many times, this addition can inflate the bottom line and make the net income look better than it actually will be when the companies are fully merged.

Be sure to look closely at the impact any mergers, acquisitions, or even sales of parts of an acquired company have on net income.

A merger or acquisition may positively impact the bottom line for a year or two, and then the company's performance drops dramatically as it sorts out various issues regarding overlapping operations and staff. Many times, the announcement of a merger or acquisition generates excitement, causing stock prices to skyrocket temporarily before dropping back to a more realistic value.

Don't get caught up in the short-term euphoria of a merger or acquisition when you're considering the purchase of stocks. Read the details in the notes to the financial statements to find out more about the true impacts of the merger or acquisition transaction.

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About the book author:

Lita Epstein, who earned her MBA from Emory University’s Goizueta Business School, enjoys helping people develop good financial, investing and tax-planning skills.
While getting her MBA, Lita worked as a teaching assistant for the financial accounting department and ran the accounting lab. After completing her MBA, she managed finances for a small nonprofit organization and for the facilities management section of a large medical clinic.
She designs and teaches online courses on topics such as investing for retirement, getting ready for tax time and finance and investing for women. She’s written over 20 books including Reading Financial Reports For Dummies and Trading For Dummies.
Lita was the content director for a financial services Web site, MostChoice.com, and managed the Web site, Investing for Women. As a Congressional press secretary, Lita gained firsthand knowledge about how to work within and around the Federal bureaucracy, which gives her great insight into how government programs work. In the past, Lita has been a daily newspaper reporter, magazine editor, and fundraiser for the international activities of former President Jimmy Carter through The Carter Center.

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