Hi guys, If anyone is in the FSA book (I started with it first, don’t ask why) and you have reached Page 68, can you please clarify the statement in the bottom paragraph (4th line of bottom paragraph), where it says: “XYZ has net income (based on XYZ’s book value) of $60,000 per year.” As far as I can tell, it seems to me that the $60K net income for XYZ is arbitrarily provided, yet the wording of this seems to imply that it has been derived from the book value figures provided. Any insight into this? If so, thanks in advance.
wubbus: Your first statement is correct - the $60k net income of XYZ is just an arbitrary number, just like the $80k net income for ABC is an arbitrary number. They worded it like this in order for the reader to assume that “let’s assume that this $60k net income is based on the book value (as opposed to fair market value, etc.)”! That’s it! There is nothing more to it, and nothing less! And just for the note, I have not started preparing yet. I did not even open the books until I saw your post which raised my curiosity!!! grrrrrrrrr… -ron-
RONYUSA, Thanks for your help, much appreciated. I guess my only confusion was that they were linking it back to the amount that was in Retained Earnings for XYZ. In reality, you can’t really talk about net income in terms of book value or fair market value though, can you? Unless this is a concept that I am not really familiar with yet. Thanks, wubbus
wubbus: Good question. I am not yet familiar myself with this concept, so I don’t want to spread misleading information, I guess I will learn more once I actually start studying. But from what I read last night (those 2 pages with the exampes), it seemed to me that under fair market vs. book value, the net income could be different because in one of those methods, called the pooled method, you count in the added, post-merger depreciation (which is an expense item and reduces your net income) while in the other one (historic / book value method) you don’t include the added, post-merger depreciation from the additional acquired assets. I think they have illustrated this using an example in page 69 if I remember correctly. May be some of the experienced people here who are familiar with this concept can shed more light on the matter. Anyways, good luck with the preparation. See you around. -ron-
do the fsa topics build on level 1? or are there other accounting concepts, not covered in l1, that you need to be familiar with from a basic accounting foundation? thanx !