Assume that you are working part-time as an accountant for a small proprietary company, and the shareholders
Question:
Assume that you are working part-time as an accountant for a small proprietary company, and the shareholders are all members of the board of directors (BOD). The BOD wants to invest excess company cash in shares, and you have been asked to select 15 listed companies that you think suitable for investment of these funds. Your selected companies have high goodwill balances, and the BOD is not convinced that the goodwill value is useful information in making the investment decision since this asset has no physical existence, its value is not readily verifiable, and its value depends on management estimates and judgments. Your task is to write a report for the BOD that includes the following aspects to explain the usefulness or not of goodwill in making investment decisions. • Use the research literature and explain whether, and if so how, goodwill is a useful asset with future earnings potential and whether investors tend to use this information when making their investment decisions.
Fundamentals of Financial Accounting
ISBN: 978-0078025914
5th edition
Authors: Fred Phillips, Robert Libby, Patricia Libby