Cinnamon, Inc. is a diversified manufacturing company headquartered in the United Kingdom. It complies with IFRS. In 2009, Cinnamon held a 19 percent passive equity ownership interest in Cambridge Processing that was classified as available-for-sale. During the year, the value of this investment rose by £2 million. In December 2009, Cinnamon announced that it would be increasing its ownership interest to 50 percent effective 1 January 2010 through a cash purchase. Cinnamon and Cambridge have no intercompany transactions.

Peter Lubbock, an analyst following both Cinnamon and Cambridge, is curious how the increased stake will affect Cinnamon’s consolidated financial statements. He asks Cinnamon’s CFO how the company will account for the investment and is told that the decision has not yet been made. Lubbock decides to use his existing forecasts for both companies’ financial statements to compare the outcomes of alternative accounting treatments. Lubbock assembles abbreviated financial statement data for Cinnamon (Exhibit 1) and Cambridge (Exhibit 2) for this purpose.

Estimates made prior to announcement of increased stake in Cambridge.

Compared to Cinnamon’s operating margin in 2009, if it is deemed to have control of Cambridge, its operating margin in 2010 will most likely be:

A. lower.

B. higher.

C. the same.

 

 
 
 

EXHIBIT 1 Selected Financial Statement Information for Cinnamon, Inc. ( Millions) Year ending 31 December 2009 2010* Revenue 1,400 1,575 Operating income 126 142 Net income 62 69 31 December 2009 2010 Total assets 1,170 1,317 Shareholders' equity 616 685