What is Goodwill - Goodwill Accounting in Investments | Summary and Q&A

TL;DR

Goodwill is an intangible asset that occurs when one company buys another, and it can have positive or negative effects on a company's stock price and financials.

Key Insights

• 🪐 Goodwill is created when one company acquires another and represents the premium paid for the acquired company's net assets.
• 🥺 Goodwill can have positive effects if the acquisition enhances growth and cash flows, but overpaying can lead to a goodwill impairment, decreasing net income and stock price.
• 🪐 Paying less than net assets in an acquisition is rare but can result in a gain in goodwill and potentially increase stock price.

Transcript

what is goodwill in this video we will look at what goodwill is where it comes from and towards the end of the video we will demonstrate how it can make a company's stock move higher or lower okay let's get started goodwill is an intangible asset that appears on a company's balance sheet so how does goodwill occur goodwill can occur when one compan... Read More

Questions & Answers

Q: What is goodwill and how does it occur?

Goodwill is an intangible asset that appears on a company's balance sheet and is created when one company buys another. It represents the premium paid for the acquired company's net assets.

Q: How does goodwill affect a company's financials?

Goodwill can have positive effects if the purchase price is considered fair and the acquisition enhances the company's growth. However, if the purchase price is deemed too high, a goodwill impairment may be necessary, resulting in a decrease in net income and earnings per share.

Q: Is it common to pay less than net assets in an acquisition?

Paying less than net assets in an acquisition is less common than paying a premium. However, in certain situations where the acquired company is in trouble and needs to sell quickly, it is possible to pay less than net assets, leading to a gain in goodwill and potentially increasing stock price.

Q: How can investors find information about goodwill for a specific company?

Investors can check the footnotes of the company's financial statements or press releases to find details about goodwill and its origin in a specific acquisition.

Summary & Key Takeaways

• Goodwill is an intangible asset that appears on a company's balance sheet and is created when one company buys another.

• It represents the difference between the purchase price and the net asset value of the acquired company.

• Goodwill can have positive or negative effects on a company's financials, depending on whether the purchase price is considered fair or if there is a need for a goodwill impairment.