Which of the following is an effect of using cash to finance an acquisition?

Which of the following is an effect of using cash to finance an acquisition?

• A. Increased Interest Expense on Debt.
• B. Creation of Goodwill & Other Intangibles.
• C. Foregone Interest on Cash.
• D. Combined Financial Statements.

Answer: (C)

When you pay cash to finance an acquisition, the key effect is foregone interest on cash. Using cash removes that amount from your liquid assets and you lose the potential interest or investment return you could have earned if you had kept the cash invested. This is an opportunity cost known as foregone interest on cash. The other outcomes don’t arise specifically from paying with cash: financing with cash does not create more interest expense (that would happen if you used debt), it doesn’t by itself create goodwill or other intangibles (those depend on the purchase price relative to the fair value of net assets), and it doesn’t inherently change whether financial statements are presented as consolidated versus combined.

When you pay cash to finance an acquisition, the key effect is foregone interest on cash. Using cash removes that amount from your liquid assets and you lose the potential interest or investment return you could have earned if you had kept the cash invested. This is an opportunity cost known as foregone interest on cash.

The other outcomes don’t arise specifically from paying with cash: financing with cash does not create more interest expense (that would happen if you used debt), it doesn’t by itself create goodwill or other intangibles (those depend on the purchase price relative to the fair value of net assets), and it doesn’t inherently change whether financial statements are presented as consolidated versus combined.