Question

Two national companies both sell a variety of soaps and lotions. When looking at the balance sheets, one company lists goodwill as an asset, but the other company does not. What does this tell you about these companies?

Options:

a) The first company purchased patents above market value to expand their product line, whereas the second company likely developed all of their patents in-house.

b) The first company regularly donates to charitable causes, whereas the second company does not donate to charitable causes.

c) The first company added research and development costs as an intangible asset, whereas the second company expensed their research and development costs immediately.

d) The first company purchased an entire business to expand the company, whereas the second company likely has not yet purchased another entire business.

Answer 1

Goodwill on a company's balance sheet indicates that the company has likely acquired another business, paying a premium above the fair market value of its net assets, which may include brand reputation and customer relations.

Step-by-step explanation:

When comparing two national companies that sell soaps and lotions, if one company lists goodwill as an asset on the balance sheet while the other does not, it indicates that the first company has likely made significant acquisitions. Goodwill is an accounting term that represents the premium paid above the fair market value of the net assets when a company purchases another business.

This means that the company that lists goodwill has likely purchased an entire business as part of its expansion strategy, while the company without goodwill on its balance sheet may have grown organically or not made any major acquisitions.

Goodwill is an important intangible asset that can include brand reputation, customer relations, and proprietary technology which the company acquires when it purchases another company. It does not suggest that the first company purchased patents specifically, donated to charitable causes, or capitalized research and development costs, as these would be accounted for differently on the balance sheet.