Question

Question:
In your informed opinion, should there be one method of accounting for all business combinations? If so, which method is theoretically most appropriate? Or do economic circumstances exist that dictate more than one method? If so, which methods would be most appropriate (and under what circumstances)? Regardless of your opinion, be sure to adequately address the advantages and disadvantages of a single method vs. multiple methods.

Note: In answering this question, keep in mind that a business combination could range from an all-stock transaction (a stock swap) to an all-cash transaction. Also keep in mind that some combinations are clearly acquisitions, while others are more like mergers.

Answer 1

In my opinion, there should not be only one method of accounting for all business combinations.

Accounting methods are the means of recording when income is received and expenses are paid so that profit can be determined for a specific time period, called the accounting period. There are two methods of accounting:

1. Cash receipts and disbursements method

2. Accrual method

Once an accounting method is chosen, a business can only change it with the consent of IRS. Both the accounting methods are equally important by depending upon the nature of business and business combinations. One accounting method for all business combinations will not result in positive manner. Different business organizations need different accounting method for their income and expenses.

Cash method of accounting

Under the cash-receipts method, cash, property or services are included in the taxpayers gross income in the year of actual or constructive receipt.

Accrual accounting  

Accrual accounting more accurately represents the financial status of the business because income is recorded when it is earned rather than when it is received; likewise, expenses are recognized when they are incurred rather than when they are paid.

Although cash accounting is easier to implement, a business eventually reaches a size where it must provide financial reports to stakeholders, such as lenders or stockholders, that more accurately reflects the financial health of the business.

Both the methods are used by different business organizations by depending upon their business combinations.