14 - 1 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e,...

Segment and InterimFinancial Reporting

Chapter 14

Learning Objective 1

Understand the management

approach to segment

reporting.

Identifying Reportable Segments

Segments determined by the managementapproach are called operating segments.

Statement 131 characterizes an operatingsegment as a component of an enterprise…

Identifying Reportable Segments

(1) that engages in business activities from whichit may earn revenues and incur expenses;

(2) whose operating results are regularlyreviewed by the chief decision maker;

and (3) for which discrete financialinformation is available.

Aggregation Criteria

An enterprise may combine similar operatingsegments if aggregation is consistent with the

objectives of Statement No. 131 and thesegments have similar economic characteristics.

Quantitative Thresholds

Operating segments are reportableif they meet materiality thresholds.

Once reportable segments are identified,all other operating segments are combined

with other business activities in an “all other”category for reporting purposes.

Reconsideration ofReportable Segments

Reported segments must include 75%of all external revenue.

If reportable segments do not meet this criterion,additional segments must be identified asreportable, even if they do not meet the

quantitative thresholds.

Apply reportable operating

segment tests.

Illustration of the Tests forReportable Operating Segments

Revenue test Asset test

Operating profit test

Phil-Brown Corporation appliesthe three materiality tests.

Revenue Test

Operating ReportableSegment’s Intersegment Test Value Segment Under Revenue Revenue (10% × $670,000) Revenue Test?

Food $150,000 $ 0 $67,000 YesPaper 170,000 200,000 67,000 YesCopper 40,000 0 < 67,000 NoFinance 60,000 50,000 67,000 Yes Total $420,000 $250,000

Asset Test

Operating Reportable Segment’s SegmentIdentifiable Test Value Under Asset Assets (10% × $1,010,000) Test?

Food $ 200,000 $101,000 YesPaper 250,000 101,000 YesCopper 60,000 < 101,000 NoFinance 500,000 101,000 Yes Total $1,010,000

Operating Profit Test

ReportableOperating Operating Segment Segment’s Segment’s UnderOperating Operating Test Value Operating Profit Loss (10% × $130,000) Profit Test?

Food $ 25,000 $13,000 YesPaper 55,000 13,000 YesCopper $(10,000) < 13,000 NoFinance 50,000 13,000 Yes Total $130,000 $(10,000)

Comprehend segment disclosure

and enterprisewide

disclosure details.

Segment Disclosures

The basis of organization used by the chiefoperating decision maker to determineoperating segments must be disclosed.

Any aggregation of operating segmentsused in arriving at these reportablesegments must also be disclosed.

Segment Disclosures

Profit/loss and asset information

Measurement

Reconciliation requirements

Enterprisewide Disclosures

Products and services

Geographic information

Major customers

Understand the similarities and

differences of interim reporting

and annual reporting.

Interim Financial Reporting

Interim financial reports are commonlyissued on a quarterly basis.

They typically include cumulative,year-to-date information, as wellas comparative information for

corresponding periods of the prior year.

Nature of Interim Reports

Interim financial reports provide more timely,but less complete, information than

annual financial reports.

Product Costs

A company can use this method forinterim reporting purposes when it doesnot use the perpetual inventory method.

Product Costs

LIFO inventory layers can be liquidatedduring an interim period but expected

to be replaced by year end.

Cost of sales can include the replacementcost of the liquidated LIFO layer if the

reduction is determined to be temporary.

Product Costs

Permanent inventory market declinesare recognized in the interim period.

Product Costs

Planned variances under a standardcost system that are expected to beabsorbed by year end are usually

deferred at the interim date.

Expenses Other Than Product Costs

Annual expenses

Advertising costs

Income taxes

Compute interim-period

income tax expense.

Computation of the EstimatedAnnual Effective Tax Rate

Small Corporation bases its estimate onthe following assumed tax-rate schedule:

If Taxable Income Is: But

Over Not Over 0 $ 50,000

$ 50,000 75,000 75,000 100,000 100,000 335,000 355,000 –

The Tax Is:Of the

Pay + Excess Amount Over15% 0

$ 7,500 + 25 $ 50,000 13,750 34 75,000 22,250 39 100,000

Small Corporation EstimatedQuarterly Income Tax

$22,250 ÷ $100,000 = 22.25%

Quarter Estimated Income Rate Estimated TaxFirst $ 20,000 × 15% $ 3,000Second 30,000 × 15 4,500Third 25,000 × 25 6,250Fourth 25,000 × 34 8,500 Totals $100,000 $22,250

Small Corporation EstimatedQuarterly Income Tax

$20,000 × 22.25% = $4,450

First Second Third FourthQuarter Quarter Quarter Quarter Fiscal

Income year-to-date $20,000 $50,000 $75,000 $100,000 $100,000Quarterly period income $20,000 $30,000 $25,000 $ 25,000 $100,000Tax expense (22.25%) – 4,450 – 6,675 – 5,563 – 5,563 – 22,250 Net income $15,550 $23,325 $19,438 $ 19,438 $ 77,750

Grasp both GAAP and SEC

interim reporting requirements.

Guidelines for PreparingInterim Statements

At a minimum (per APB Opinion No. 28),publicly traded companies should report:

1 a Sales or gross revenuesb Provision for income taxesc Extraordinary items net of income taxesd Cumulative-effect-type changes in

accounting principlese net income

Guidelines for PreparingInterim Statements

2 Basic and diluted earnings per share3 Seasonal revenue, costs, or expenses4 Significant changes in estimates of income

tax expense5 Disposal of a segment of a business and

extraordinary and unusual items6 Contingent items7 Changes in accounting principles and estimates8 Significant changes in financial position

Segment Disclosures inInterim Reporting

Revenue from external customers

Intersegment revenues

Total assets for which there has been amaterial change since the last annual report

3 A measure of segment profit or loss

Segment Disclosures inInterim Reporting

A description of any differences in the basisof segmentation or measurement of segment

profit or loss since the last annual report

A reconciliation between segmentand total profits

SEC Interim Financial Disclosures

The SEC requires that quarterly reports beprepared for the company’s stockholders

and for filing with the SEC.

These reports are to be prepared usingGAAP and are filed on Form 10-Q.

Part I of Form 10-Q contains thefollowing summary of contents:

Part I – Financial InformationItem 1 – Consolidated Balance Sheet

Consolidated Statement of IncomeConsolidated Statement of Cash FlowsNotes to Consolidated Financial Statements

Item 2 – Management’s Discussion of Financial Condition and Results of Operations

Companies present comparative balancesheets as of the end of the current quarter

and at the prior year-end.

Comparative income statements are presentedfor the current quarter and the same quarter of

the prior year plus the current year-to-dateand the prior year-to-date.

End of Chapter 14

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