Question

Consider two companies, both manufacture autonomous vehicles, but they have different company strategies to acquire the necessary intellectual property to develop and produce their products.

MG is a traditional car manufacturer and with limited internal capacity and experience in the technologies needed for autonomous vehicles. The company undertook a series of acquisitions over the past five years, purchasing companies that have developed the needed sensors, artificial intelligence systems, and digital mapping tools to produce cars that can drive autonomously. They have spent a total of $100 billion on the companies they purchased. This amount includes $25 billion of intangible assets and $25 billion of goodwill.
MoWay, a division of a large software development and advertising firm, has developed all of the necessary technology for autonomous driving themselves. It has taken them five years to develop and test these technologies. They have spent a total of $100 billion in this massive research and development project.
In 2020, the year after these five-year projects were concluded, both companies launch wildly successful autonomous vehicles generating substantial sales, gross margins, and profits. The cars they developed sell for similar prices and have materials and labor costs that are approximately the same.
Required:
a. If you conducted a financial analysis of these two companies, how would their balance sheets, income statements, and financial ratios be similar and how would they be different?
b. Do these differences represent something useful to the users of their financial statements or are they only different because of the accounting artifacts resulting from their different strategies.

Answer 1

MG's balance sheet will show significant intangible assets and goodwill from acquisitions, while MoWay's financials will heavily reflect their R&D expenses, affecting profitability and valuation ratios. These differences provide insights into each company's strategy, technological base, and risk profile.

Step-by-step explanation:

When considering two companies, both manufacturing autonomous vehicles with different strategies, the financial statements would reflect the distinct paths taken in acquiring intellectual property. For MG, the balance sheet would show $25 billion of intangible assets and another $25 billion of goodwill from the acquisitions. These items would affect the company’s asset valuations and ratios that measure profitability as well as equity valuation. In contrast, MoWay’s balance sheet won’t show these intangible assets and goodwill from acquisitions since they developed the technology in-house. Instead, their balance sheet would reflect the $100 billion spent on research and development as an expense over the development period, assuming they didn’t capitalize any of it. The income statement for MG will not show such a large R&D expense, leading to potentially higher net income figures in comparison to MoWay in the development years.

The differences in financials can be informative for users, providing insight into each company’s investment and acquisition strategy, technological capability, and potential future income streams. MG’s approach suggests a diversified technology base through acquisitions and might have a higher debt level due to the funding of acquisitions, whereas MoWay’s financials reflect a singular dedication to in-house development, potentially indicating a strong innovation capability while also implying the risk taken without assurance of success.