Please refer to http://www.analystforum.com/phorums/read.php?12,1150216 when we make consolidation, i am not very sure when cash need to be subtracted? can someone give some summary? my head explode!
This really is a very simple concept. You have to ask yourself two questions. First, is cash involved or is this an all equity transaction? If its all equity, then you don’t touch cash. Now let’s say that the acquisition involves cash. You’re going to be given the purchasers balance sheet in the problem. This second question you ask is, was the balance sheet prepared before or after the purchase? If it was before the money was spent (ie the aquisition took place) , you need to subtract it. if the balance sheet was prepared after the money was spent you do nothing with cash. Hope this helps
awesome. one small point. what does “BS is compiled right after the acquisition” mean?
“B/S compiled right after the acquisition” means that it has taken into account of the consolidation (the parent has consolidated the sub’s B/S). Like what Super I said above, if it was a cash transaction and the B/S is noted that it was “compiled right after acquisition” means that the cash spent to acquire the company has been already reflected in the B/S (subtracted out). Also want to add is whether the cash used to buy the company’s stocks is newly issued or buying from the owners. If buying newly issued shares then you wouldn’t subtract the cash out when consolidating.
Yeah, I brought up that question in the referenced post, and finally got around to looking at my Schweser notes on the subject. There’s an example of an acquisition where the cash departs from the parent company and… it never really says where it goes. I think joseph213 is correct in that there could easily be a case where new shares are issued and there would be no cash transacted, but unless it explicitly says that, it looks like the curriculum (read: what you need to know for next Saturday) intends for you to take the cash out for any kind of intercorporate investment, and only in the case of Equity method do you get a solitary investment asset in return; the other methods involve combining parent & consolidated entity balance sheets.
Cash gets paid to the acquiree’s shareholders. From there, they can do anything they want with it. Let’s say you owned 1,000 shares of Wyeth @ $50. Big pharma co acquires Wyeth for $55 bucks a share. So now you have $55,000 in cash for that new BMW.