Amalgamation, Absorption and External Reconstruction of Joint Stock Companies

 Amalgamation, Absorption & External Reonstruction

 Amalgamation : Amalgamation is a business combination. It means formation  of  a new company to take over the existing business of  two  or more  companies. Sections 391, 394, 394A, 395 & 396A of the Companies Act 1956 deal with amalgamation of the companies.

In  amalgamation,  old existing companies will close  down  their business  &  their  assets & liabilities are transferred  to  the  new company's account as per the agreement.

Absorption : When one company buys another and integrates its operations, assets, and liabilities with those of the acquired company, a limited company is absorbed. This can be achieved through a merger or acquisition procedure.

When two or more businesses merge, a new firm is created. The shareholders of the merging firms become shareholders in the new company, and the assets and liabilities of the merging companies are transferred to it.

A company buys the assets and liabilities of another company in an acquisition. The purchased company's shareholders may be compensated in cash, shares, or a combination of both.

A limited business may be absorbed for a number of reasons, which includes :

A bigger market share and more competition

Access to new markets or products

Integration of operations results in efficiency and cost savings.

Increased stability and financial strength

Risk diversification

However, there may be disadvantages to absorption, such as :

Integration costs and difficulties

Cultural distinctions between the two businesses

Employees and other stakeholders opposition

Regulation obstacles and authorization requirements

Possibility of decreasing shareholder value.

Before engaging in an absorption, businesses should do due diligence to evaluate the advantages and risks associated and prepare a thorough integration plan to guarantee a smooth transition.

PURCHASE CONSIDERATION :

1. Lump sum Method : If purchase consideration is more than  the  Net Assets,  the difference between the two is Goodwill & if the  purchase consideration is less than the Net Assets, the difference between  the two is Capital Reserve.

2.      Net Asset Method : Purchase consideration = Assets taken over  less Liabilities taken over.

3.      Net  Payment Method : Calculate the purchase consideration  &  the difference between the purchase consideration and the Net Assets  will be Goodwill or Capital Reserve.

ACCOUNTING TREATMENT

Journal Entries in the books of Vendor / Purchased Company

Journal Entries in the books of Purchasing Company

Ratio Analysis and Financial Statements

Introduction:

Ratio analysis is a potent tool used by financial analysts, investors, and companies to evaluate the performance and health of a company's finances. Analysts can compute and decipher many financial ratios by looking at financial documents, particularly the income statement, balance sheet, and cash flow statement. These ratios offer important information on the profitability, liquidity, solvency, and effectiveness of a company. The importance of ratio analysis, crucial financial statements, and key points to keep in mind when utilizing ratio analysis are all covered in this chapter.

Financial Statements:

1.1. Income Statement: The income statement summarizes the revenues, costs, and net income of a corporation.

Revenues, cost of goods sold (COGS), operational expenses, non-operating items, and taxes are important factors.

It displays the performance and profitability of a business over a specific time frame.

1.2 Balance Sheet

The balance sheet provides a moment in time view of a company's financial situation.

It consists of shareholders' equity, assets, and liabilities.

Liabilities show what a corporation owes, whereas assets show what it has, and shareholders' equity shows the ownership stake.

The liquidity and solvency of a corporation are disclosed on the balance sheet.

1.3 Cash Flow Statement

The cash inflows and outflows within a certain time period are tracked by the cash flow statement.

Operating activities, investing activities, and financing activities make up its three divisions.

The cash flow statement shows how well a business can produce and handle cash.

Liquidity Ratios:

2.1. Ratio Analysis:

Using liquidity measures, you may gauge a company's capacity to pay short-term debts.

The quick ratio and the current ratio are typical liquidity ratios.

These ratios aid in determining if a business has enough cash and assets to pay its short-term obligations.

Ratios of Profitability:

A company's capacity to make profits in relation to its revenue, assets, and equity is gauged by profitability ratios.

The gross profit margin, operating margin, and return on equity (ROE) are examples of common profitability ratios.

These ratios can be used to evaluate a company's productivity and profitability.

2.4 Efficiency Ratios:

Efficiency ratios assess how well a business uses its resources and assets.

Inventory turnover, accounts receivable turnover, and asset turnover are important efficiency ratios.

These statistics show how effectively a business operates and how well it can make money off its assets.

2.5 Market Ratios

Market ratios represent how the market views the worth and prospects of a company.

The price-to-earnings (P/E) ratio and earnings per share (EPS) are examples of common market ratios.

Investors can use these statistics to assess if the shares of a company is overvalued or undervalued.

3.1. Peer and Industry Comparison:

To acquire useful insights, it is essential to contrast a company's ratios with those of its competitors and the industry as a whole.

The success of a company should be assessed in the context of its particular industry because ratios differ throughout industries.

3.2 Historical Analysis

Comparing ratios from different time periods to conduct a trend analysis makes it easier to spot trends and assess a company's performance over time.

A more comprehensive viewpoint is provided by historical analysis, which also identifies any shifts or trends in financial performance.

3.3. Ratio analysis's drawbacks:

Ratio analysis has drawbacks, including its reliance on historical data and disregard for qualitative considerations.

Along with ratio analysis, it is crucial to take into account other elements including market trends, competitive dynamics, and management caliber.

Ratio analysis is an effective method that offers important insights into the health and performance of a company's finances. Analysts can evaluate a company's profitability, liquidity, solvency, and efficiency by scrutinizing financial statements and computing different ratios. 

Ratio analysis is a potent instrument that offers important insights into the financial performance and health of an organization. Analysts can determine a company's profitability, liquidity, solvency, and efficiency by examining financial documents and calculating various ratios. Making well-informed decisions based on ratio analysis requires taking into account historical patterns, industry benchmarks, and qualitative aspects.

DEPRECIATION

DEPRECIATION

Depreciation is assessed to represent the true worth of assets on the balance sheet and to appropriately determine profit or loss.

Depreciation, then, is the continuous, ongoing, and irreversible loss of value resulting from normal wear and tear or any other comparable cause in a fixed asset. Assets can be depreciated in six different ways. As only a few instances, consider the following techniques: fixed installment, straight line, beginning cost, decreasing or reducing balance, written-down value, annuity, revaluation, depreciation, sinking fund, and insurance policy processes. However, this year we will be studying the first two methods.

(i) Fixed Instalment / Straight Line / Original Cost Method: Under this method, depreciation is charged at a fixed rate at the end of every year during the lifetime of an asset. The formula for depreciation :

Depreciation =  Original Cost of asset + Installation Charges – Break-up Value / Scrap Value

Estimated Life Of An Asset

(ii) Diminishing Balance / Reducing Balance/ Written Down Value Method : Under this method, depreciation is charged on the opening balance of the asset each year at a given rate.

An amount received when an asset is sold after its useful life is called Scrap Value / Residual Value / Break up Value.

Charges incurred for the erection of the machinery are called Installation Charges / Erection Charges.

ACCOUNTING TREATMENT
1. When any asset is purchased
                    Asset A/c. Dr.
                        To Cash / Bank A/c.

2. When depreciation is charged
                    Depreciation A/c. Dr.
                        To Asset A/c.

3. When depreciation is transferred to Profit & Loss A/c.
                    Profit & Loss A/c. Dr.
                        To Depreciation A/c.

4. When any is sold
                    Cash / Bank A/c. Dr.
                        To Asset A/c.

5. When there is loss on sale of any asset
                    Profit & Loss A/c. Dr.
                        To Asset A/c.

When there is profit on sale of asset vice-versa