Terri Chichester
MT482
Unit 5-Assignment

Required:
a. Describe how merger-related accounting inhibits a user’s ability to use accounting reports to make period-to-period comparisons. Is this true for both the purchase method and the pooling method? Explain.
Merger related accounting inhibits the period to period comparisons because with the pooling method financial statements are restated effectively making the acquired company part of the parent before the deal is finalized hindering period to period comparisons.

b. Explain why a high price-to-earnings ratio is crucial to Tyco’s acquisitions strategy.

With a high price to earnings ratio Tyco can acquire any company for less stock than with a lower P/E ratio and a high P/E ratio will attract investors and stockholders with the promise of large returns in the future.

c. How do merger-related charges potentially enable a company to inflate future operating earnings? How can a user of financial statements assess whether this is occurring?

Pooling method understates the assets of subsidiary company, decline the amount of depreciation expense, and ignore premium amortization over the book value. As a result pooling accounting can potentially enable a company to inflate future operating earnings.
A user of financial statements can assess whether this is happening by looking at the company’s notes and disclosures of merger, restructuring, and non-recurring charges.

d. Many short-term gains in acquisition come from cutting costs. What potential long-term harm can cost-cutting create?

Cost-cutting can create inflated income, or possibly a loss of long-term income and gains, loss of seasoned employees because of cost cutting layoffs.

e. Tyco’s controversy is arguably a quality of earnings concern, where Tyco strategically used the discretion in GAAP. Why is the market’s reaction to this alleged