To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter 14 Reporting for Segments and for Interim Financial Periods A component of an enterprise that may earn revenues and incur expenses, and about which management evaluates separate financial information in deciding how to allocate resources and assess performance is a(n) a identifiable segment b operating segment c reportable segment d industry segment An entity is permitted to aggregate operating segments if the segments are similar regarding the a nature of the production processes b types or class of customers c methods used to distribute products or provide services d all of these Which of the following is not a segment asset of an operating segment? a Assets used jointly by more than one segment b Assets directly associated with a segment c Assets maintained for general corporate purposes d Assets used exclusively by a segment SFAS No 131 requires the disclosure of information on an enterprise's operations in different industries for each annual period presented each interim period presented the current period only a b c d both and Which of the following is not required to be disclosed by SFAS No 131? a Information concerning the enterprise's products b Information related to an enterprise's foreign operations c Information related to an enterprise's major suppliers d All of the above are required disclosures To determine whether a substantial portion of a firm's operations are explained by its segment information, the combined revenue from sales to unaffiliated customers of all reportable segments must constitute at least a 10% of the combined revenue of all operating segments b 75% of the combined revenue of all operating segments c 10% of the combined revenue from sales to unaffiliated customers of all operating segments d 75% of the combined revenue from sales to unaffiliated customers of all operating segments http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 14-2 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition A segment is considered to be significant if its reported profit is at least 10% of the combined profit of all operating segments reported profit (loss) is at least 10% of the combined reported profit of all operating segments not reporting a loss reported profit (loss) is at least 10% of the combined reported loss of all operating segments that reported a loss a b c d both and Which of the following disclosures is not required to be presented for a firm's reportable segments? a Information about segment assets b Information about the bases for measurement c Reconciliation of segment amounts and consolidated amounts for revenue, profit or loss, assets, and other significant items d All of these must be presented Current authoritative pronouncements require the disclosure of segment information when certain criteria are met Which of the following reflects the type of firm and type of financial statement for which this disclosure is required? a Annual financial statements for publicly held companies b Annual financial statements for both publicly held and nonpublicly held companies c Annual and interim financial statements for publicly held companies d Annual and interim financial statements for both publicly held and nonpublicly held companies 10 An enterprise determines that it must report segment data in annual reports for the year ended December 31, 2011 Which of the following would not be an acceptable way of reporting segment information? a Within the body of the financial statements, with appropriate explanatory disclosures in the footnotes b Entirely in the footnotes to the financial statements c As a special report issued separately from the financial statements d In a separate schedule that is included as an integral part of the financial statements 11 Selected data for a segment of a business enterprise are to be separately reported in accordance with SFAS No 131 when the revenues of the segment is 10% or more of the combined a net income of all segments reporting profits b external and internal revenue of all reportable segments c external revenue of all reportable segments d revenues of all segments reporting profits http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter 14 Reporting for Segments and for Interim Financial Periods 14-3 12 Long Corporation's revenues for the year ended December 31, 2011, were as follows Consolidated revenue per income statement $800,000 Intersegment sales 105,000 Intersegment transfers 35,000 Combined revenues of all operating segments $940,000 Long has a reportable segment if that segment's revenues exceed a $80,000 b $90,500 c $94,000 d $14,000 13 Sales to unaffiliated customers Sales – intersegment Loan interest income – intersegment Loan interest income – unaffiliated Income from equity method investees Revenue test (dollars in thousands) Wholesale Retail Finance Segment Segment Segment $3,600 $1,500 $-0400 240 -0-0120 900 -0240 80 -0280 -0- Determine the amount of revenue for each of the three segments that would be used to identify the reportable industry segments in accordance with the revenues test specified by SFAS 131 a b c d 14 Wholesale $3,600 4,000 4,000 4,000 Retail $1,500 1,740 1,980 2,380 Finance $ -0-0980 980 Which of the following is not part of the information about foreign operations that is required to be disclosed? a Revenues from external customers b Operating profit or loss, net income, or some other common measure of profitability c Capital expenditures d Long-lived assets http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 14-4 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition 15 Eaton, Inc., discloses supplemental industry segment information The following data are available for 2011 Traceable Segment Sales operating expenses A $420,000 $255,000 B 480,000 300,000 C 300,000 165,000 $1,200,000 $720,000 Additional 2011 expenses, not included above, are as follows: Indirect operating expenses General corporate expenses $240,000 180,000 Appropriate common expenses are allocated to segments based on the ratio of a segment's sales to total sales What should be the operating profit for Segment C for 2011? a $135,000 b $ 75,000 c $ 105,000 d $ 30,000 16 Gant Company has four manufacturing divisions, each of which has been determined to be a reportable segment Common operating costs are appropriately allocated on the basis of each division's sales in relation to Gant’s aggregate sales Gant’s Delta division accounted for 40% of Gant's total sales in 2011 For the year ended December 31, 2011, Delta had sales of $5,000,000 and traceable costs of $3,600,000 In 2011, Gant incurred operating costs of $350,000 that were not directly traceable to any of the divisions In addition, Gant incurred interest expense of $360,000 in 2011 In reporting supplementary segment information, how much should be shown as Delta's operating profit for 2011? a $1,400,000 b $1,256,000 c $1,260,000 d $1,116,000 17 For external reporting purposes, it is appropriate to use estimated gross profit rates to determine the ending inventory value for a b c d 18 Interim Reporting No No Yes Yes Annual Reporting No Yes No Yes Inventory losses from market declines that are expected to be temporary a should be recognized in the interim period in which the decline occurs b should be recognized in the last (fourth) quarter of the year in which the decline occurs c should not be recognized d none of these http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter 14 Reporting for Segments and for Interim Financial Periods 14-5 19 Gains and losses that arise in an interim period should be a recognized in the interim period in which they arise b recognized in the last quarter of the year in which they arise c allocated equally among the remaining interim periods d deferred and included only in the annual income statement 20 If a cumulative effect type accounting change is made during the first interim period of a year a no cumulative effect of the change should be included in net income of the period of change b the cumulative effect of the change on retained earnings at the beginning of the year should be included in net income of the first interim period c the cumulative effect of the change should be allocated to the current and remaining interim periods of the year d none of these 21 Which of the following does not have to be disclosed in interim reports? a Seasonal costs or expenses b Significant changes in estimates c Disposal of a segment of a business d All of these must be disclosed 22 For interim financial reporting, the effective tax rate should reflect Anticipated Tax Credits a Yes b Yes c No d No Extraordinary Items Yes No Yes No 23 Companies using the LIFO method may encounter a liquidation of base period inventories at an interim date that is expected to be replaced by the end of the year In these cases, cost of goods sold should be charged with the a cost of the most recent purchases b average cost of the liquidated LIFO base c expected replacement cost of the liquidated LIFO base d none of these 24 In considering interim financial reporting, how did the Accounting Principles Board conclude that each reporting should be viewed? a As a "special" type of reporting that need not follow generally accepted accounting principles b As useful only if activity is evenly spread throughout the year so that estimates are unnecessary c As reporting for a basic accounting period d As reporting for an integral part of an annual period 25 When a company issues interim financial statements, extraordinary items should be a allocated to the current and remaining interim periods of the current year on a pro rata basis b deferred and included only in the annual income statement c included in the determination of net income in the interim period in which they occur d charged or credited directly to retained earnings so that comparisons of interim results of operations will not be distorted http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 14-6 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition 26 If annual major repairs made in the first quarter and paid for in the second quarter clearly benefit the entire year, when should they be expensed? a An allocated portion in each of the last three quarters b An allocated portion in each quarter of the year c In full in the first quarter d In full in the second quarter 27 During the second quarter of 2011, Dodge Company sold a piece of equipment at a gain of $90,000 What portion of the gain should Dodge report in its income statement for the second quarter of 2011? a $90,000 b $45,000 c $30,000 d $ -0- 28 In January 2011, Abel Company paid $200,000 in property taxes on its plant for the calendar year 2011 Also in January 2011, Abel estimated that its year-end bonuses to executives for 2011 would be $800,000 What is the amount of expenses related to these two items that should be reflected in Abel's quarterly income statement for the three months ended June 30, 2011 (second quarter)? a $ -0b $250,000 c $ 50,000 d $200,000 29 For interim financial reporting, a company's income tax provision for the second quarter of 2011 should be determined using the a statutory tax rate for 2011 b effective tax rate expected to be applicable for the full year of 2011 as estimated at the end of the first quarter of 2011 c effective tax rate expected to be applicable for the full year of 2011 as estimated at the end of the second quarter of 2011 d effective tax rate expected to be applicable for the second quarter of 2011 30 Which of the following reporting practices is permissible for interim financial reporting? a Use of the gross profit method for interim inventory pricing b Use of the direct costing method for determining manufacturing inventories c Deferral of unplanned variances under a standard cost system until year-end d Deferral of inventory market declines until year-end 31 Which of the following statements most accurately describes interim period tax expense? a The best estimate of the annual tax rate times the ordinary income (loss) for the quarter b The best estimate of the annual tax rate times income (loss) for the year to date less tax expense (benefit) recognized in previous interim periods c Average tax rate for each quarter, including the current quarter, times the current income (loss) d The previous year's actual effective tax rate times the current quarter's income http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter 14 Reporting for Segments and for Interim Financial Periods 14-7 32 The computation of a company's third quarter provision for income taxes should be based upon earnings a for the quarter at an expected annual effective income tax rate b for the quarter at the statutory rate c to date at an expected annual effective income tax rate less prior quarters' provisions d to date at the statutory rate less prior quarters' provisions 33 Finney, a calendar year company, has the following income before income tax provision and estimated effective annual income tax rates for the first three quarters of 2011: Quarter First Second Third Income Before Estimated Effective Income Tax Annual Tax Rate Provision at the End of Quarter $120,000 25% 160,000 25% 200,000 30% Finney's income tax provision in its interim income statement for the third quarter should be a $74,000 b $60,000 c $50,000 d $144,000 34 An inventory loss from a market price decline occurred in the first quarter The loss was not expected to be restored in the fiscal year However, in the third quarter the inventory had a market price recovery that exceeded the market decline that occurred in the first quarter For interim reporting, the dollar amount of net inventory should a decrease in the first quarter by the amount of the market price decline and increase in the third quarter by the amount of the market price recovery b decrease in the first quarter by the amount of the market price decline and increase in the third quarter by the amount of the decrease in the first quarter c not be affected in the first quarter and increase in the third quarter by the amount of the market price recovery that exceeded the amount of the market price decline d not be affected in either the first quarter or the third quarter 35 Advertising costs may be accrued or deferred to provide an appropriate expense in each period for Interim Annual Reporting Reporting a Yes No b Yes Yes c No No d No Yes http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 14-8 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition Problems 14-1 The following information is available for Torrey Company for 2011: a In early April Torrey made major repairs to its equipment at a cost of $90,000 These repairs will benefit the remainder of 2011 operations b At the end of May, Torrey sold machinery with a book value of $35,000 for $45,000 c An inventory loss of $60,000 from market decline occurred in July In the fourth quarter the inventory had a market value recovery that exceeded the market decline by $30,000 Required: Compute the amount of expense/loss that would appear in Torrey Company's June 30, September 30, and December 31, 2011, quarterly financial statements 14-2 Stein Corporation's operations involve three industry segments, X, Y, and Z During 2011, the operating profit (loss) of each segment was: Operating Segment Profit (Loss) X $ 600 Y 8,100 Z (6,300) Required: Determine which of the segments are reportable segments 14-3 Bass Industries operates in four different industries Information concerning the operations of these industries for the year 2011 is: Revenue Industry Segment A B C D Total $ 24,000 18,000 90,000 168,000 $300,000 Operating Segment Intersegment Profit (Loss) Assets $4,200 $ 2,700 $ 22,400 2,200 (2,000) 25,200 14,000 3,600 70,000 -023,700 162,400 $28,000 $280,000 Required: Complete the following schedule to determine which of the above segments must be treated as reportable segments 10% Test For Segment Revenue Op Profit (Loss) Segment Assets Reportable? A B C D http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter 14 Reporting for Segments and for Interim Financial Periods 14-9 14-4 Logan Company prepares quarterly financial statements The following information is available concerning calendar year 2011: Estimated full-year earnings Full-year permanent differences: Penalty for pollution Estimated dividend income exclusion Actual pretax earnings, 1/1/11 to 3/31/11 Nominal income tax rate $3,000,000 150,000 60,000 480,000 40% Required: Compute the income tax provision for the first quarter of 2011 14-5 XYZ Corporation has eight industry segments with sales, operating profit and loss, and identifiable assets at and for the year ended December 31, 2011, as follows: Steel Auto Parts Coal Mine Textiles Paint Lumber Leisure Time Electronics Total Sales to Unaffiliated Customers $1,350,000 1,200,000 600,000 530,000 1,120,000 710,000 690,000 600,000 $6,800,000 Sales to Affiliated Customers $150,000 450,000 220,000 380,000 $1,200,000 Profit or (Loss) Segment Assets $265,000 450,000 (300,000) 150,000 300,000 (75,000) 110,000 300,000 $1,200,000 $2,250,000 1,430,000 1,200,000 750,000 1,050,000 600,000 450,000 670,000 $8,400,000 Required: A B Identify the segments, which are reportable segments under one or more of the 10 percent revenue, operating profit, or assets tests After reportable segments are determined under the 10 percent tests, they must be reevaluated under a 75 percent revenue test before a final determination of reportable segments can be made Under this 75 percent test, identify if any other segments may have to be reported http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 14-10 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition 14-6 Ace Company, which uses the FIFO inventory method, had 508,000 units in inventory at the beginning of the year at a FIFO cost per unit of $20 No purchases were made during the year Quarterly sales information and end-of-quarter replacement cost figures follow: End-of- Quarter Quarter Unit Sales Replacement Cost 200,000 $17 60,000 18 85,000 13 61,000 18 The market decline in the first quarter was expected to be nontemporary Declines in other quarters were expected to be permanent Required: Determine cost of goods sold for the four quarters and verify the amounts by computing cost of goods sold using the lower-of-cost-or-market method applied on an annual basis 14-7 Barr Company’s actual earnings for the first two quarters of 2011 and its estimate during each quarter of its annual earnings are: Actual first-quarter earnings Actual second-quarter earnings First-quarter estimate of annual earnings Second-quarter estimate of annual earnings $ 800,000 1,020,000 2,700,000 2,830,000 Barr Company estimated its permanent differences between accounting income and taxable income for 2011 as: Environmental violation penalties Dividend income exclusion $ 45,000 320,000 These estimates did not change during the second quarter The combined state and federal tax rate for Barr Company for 2011 is 40% Required: Prepare journal entries to record Barr Company’s provisions for income taxes for each of the first two quarters of 2011 http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter 14 Reporting for Segments and for Interim Financial Periods 14-11 Short Answer In SFAS No 131, the FASB requires all public companies to report a variety of information for reportable segments Define a reportable segment and identify the information to be reported for each reportable segment Publicly owned companies are usually required to file some type of quarterly (interim) report as part of the agreement with the stock exchanges that list their stock Indicate two problems with interim reporting and GAAP’s position on this reporting Short Answer Questions from the Textbook For what types of companies would segmented financial reports have the most significance? Why? Why financial statement users (financial analysts, for example) need information about segments of a firm? Define the following: (a)Operating segment.(b)Reportable segment Describe the guidelines to be used in determining (a) what constitutes an operating segment, and (b) whether a specific operating segment is a significant segment List the three major types of enterprise wide information disclosures required by SFAS No 131[ASC 280], and explain how the firm’s designation of reportable segments affects these disclosures What segmental disclosures are required, if any, for interim reports? What type of disclosure is required of a firm when the major portion of its operations takes place within a single reportable segment? List the types of information that must be presented for each reportable segment of a com-pany under the rules of SFAS No 131 [ASC 280] Describe the methods that might be used to disclose reportable segment information 10 What types of information must be disclosed about foreign operations under SFAS No 131[ASC 280–10–50–40]? 11 How are foreign operations defined under SFASNo 131 [ASC 280]? 12 If the operations of a firm in some foreign countries are grouped into geographic areas, what factors should be considered in forming the groups? http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 14-12 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition 13 When must a firm present segmental disclosures for major customers? What is the reason for this requirement? 14 How are common costs distinguished from general corporate expenses for segmental purposes? 15 What is the purpose of interim financial reporting? 16 Some accountants hold the view that each interim period should stand alone as a basic accounting period, whereas others view each interim period as essentially an integral part of the annual period Distinguish between these views 17.Describe the basic procedure for computing in-come tax provisions for interim financial statements 18.Describe how changes in estimates should be treated in interim financial statements 19.What are the minimum disclosure requirements established ASC 270 for interim financial reports? 20.What is the general rule regarding the treatment of costs and expenses associated directly with revenues for interim reporting purposes? Business Ethics Question from Textbook SMC Inc operates restaurants based on various themes, such as Mex-delight, Chinese for the Buffet, and Steak-it and Eat-it The Steak-it and Eat-it restaurants have not been performing well recently, but SMC prefers not to disclose these details for fear that competitors might use the information to the detriment of SMC The restaurants are located in various geographical locations, and management currently measures profits and losses and asset allocation by restaurant concept How-ever, when preparing the segmental disclosures under SFAS No 131 [ASC 280], the company reports the segment information by geographical location only The company recently hired you to review the financial statements 1.What disclosures should the company report for segment purposes? 2.The company’s CEO believed that the rules in SFAS No 131 [ASC 280] are vague and that the company could easily support its decision to dis-close the segment data by geographic regions What would you recommend to the CEO and how would you approach the issues? http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter 14 Reporting for Segments and for Interim Financial Periods 14-13 ANSWER KEY Multiple Choice b d c d c d d d c 10 11 12 13 14 15 16 17 18 c b c c c b c c c 19 20 21 22 23 24 25 26 27 Problems 14-1 June 30 Major repairs $30,000 Gain on Sale (10,000) Inventory loss/(gain) $20,000 14-2 28 29 30 31 32 33 34 35 Sept 30 $30,000 b c a b c a b b Dec 31 $30,000 60,000 $90,000 (60,000) $(30,000) Both segments Y and Z are reportable segments because the amount of their operating profit (loss) is more than 10% of $8,700 ($600 + 8,100) - the combined operating profit of segments that did not incur a loss Any segment with an operating profit (loss) of $870 or more is a reportable segment 14-3 Segment A B C D (1) (2) (3) (4) (5) (6) 14-4 a b d b c d c b a Revenue 8% (1) 6% (2) 30% (3) 56% (4) 24,000/300,000 18,000/300,000 90,000/300,000 168,000/300,000 2,700/30,000 (2,000)/30,000 10% Test For Op Profit (Loss) 9% (5) 7% (6) 12% (7) 79% (8) (7) (8) (9) (10) (11) (12) Segment Assets 8% (9) 9% (10) 25% (11) 58% (12) 3,600/30,000 23,700/30,000 22,400/280,000 25,200/280,000 70,000/280,000 162,400/280,000 Estimated pretax full-year income Add: Pollution penalty Less: Estimated dividend income inclusion Estimated full-year taxable income Estimated income tax payable ($3,090,000 × 0.40) Estimated effective tax rate ($1,236,000/$3,000,000) First quarter tax provision ($480,000 × 0.412) $3,000,000 150,000 (60,000) $3,090,000 $1,236,000 41.2% $197.760 http://downloadslide.blogspot.com Reportable? No No Yes Yes To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 14-14 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition 14-5 A ($6,800,000 + $1,200,000) = $700,000 Steel, Auto Parts, Coal Mine, Paint Operating Profit – 10% ($1,575,000) = $157,500 Steel, Auto Parts, Coal Mine, Paint, Electronics Segment Assets – 10% ($8,400,000) = $840,000 Steel, Auto Parts, Coal Mine, Paint Revenue Test – 10% Reportable segments applying the 10% tests are: Steel, Auto Parts, Coal Mine, Paint and Electronics B 75% Revenue Test – 75% ($6,800,000) = $5,100,000 Since the 75% revenue test only applies to “Sales to Unaffiliated Customers” only, the five reportable segments from Part A only include $4,870,000 ($1,350,000 + $1,200,000 + $600,000 + $1,120,000 + $600,000) worth of sales Because the 75% test is not met, one of the segments that did not qualify as a reportable segment under the previous tests must be included as a reportable segment 14-6 Computation Sold 200,000 units @ $20 Write down of ending inventory of 308,000 units to market (308,000 × [$20 – 17]) Cost of Goods Sold Quarter Cumulative $4,000,000 924,000 4,924,000 4,924,000 Sold 60,000 units @ $17 1,020,000 Less write down recovery on ending inventory of 248,000 (248,000 × [$18 - $17]) 248,000 772,000 5,696,000 2,345,000 8,041,000 283,000 8,324,000 Sold 85,000 units @ $18 Write down of ending inventory of 163,000 units to market (163,000 × [$18 - $13]) Sold 61,000 units @ $13 Less write down recovery on ending inventory of 102,000 (102,000 × [$18 - $13]) 1,530,000 815,000 793,000 510,000 Verification Units Sold During Year FIFO Cost per Unit 406,000 × $20 Add: Write down of ending inventory to the lower of cost or market (102,000 × [$20 - $18]) Total cost of goods sold for the year http://downloadslide.blogspot.com Amount $8,120,000 204,000 $8,324,000 To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter 14 Reporting for Segments and for Interim Financial Periods 14-15 14-7 First Quarter Estimated Annual Earnings Add: Environmental Violation Penalties $2,700,000 45,000 2,745,000 320,000 $2,425,000 Deduct: Dividend Income Exclusion Estimated Taxable Income Estimated Annual Income Tax Payable ($2,425,000 × 0.40) 970,000 Estimated Effective Combined Annual Tax Rate ($970,000 / $2,700,000) Income Tax Expense Income Tax Payable ($800,000 × 0.359) 287,200 287,200 Second Quarter Estimated Annual Earnings Less: Net Permanent Differences ($320,000 - $45,000) Estimated Taxable Income $2,830,000 275,000 $2,555,000 Estimated Annual Income Tax Payable (2,555,000 × 0.40) 1,022,000 Estimated Effective Combined Annual Tax Rate ($1,022,000/$2,830,000) Cumulative Income to Date ($800,000 + $1,020,000) Estimated Income Tax Rate: Cumulative Tax Provision Needed Tax Provision in 1st Quarter Tax Provision in 2nd Quarter Income Tax Expense Income Tax Payable 35.9% 36.1% $1,820,000 0.361 657,020 287,200 $ 369,820 369,820 369,820 Short Answer A reportable segment is a segment that has passed one of three 10% tests (combined revenues, reported profit/loss and assets) or has been identified as being reportable through other criteria (i.e aggregation) The information reported includes information about (a) segment operating profit/loss; (b) segment assets, and (c) bases for measurement In addition, a reconciliation of segment amounts to the consolidated amounts for revenue, profit/loss, assets and other significant items is presented Enterprisewide disclosures regarding products or services, geographic areas, and major customers are also made Problems associated with interim reporting include the seasonal nature of many industries’ operations that can cause wide fluctuations in revenues, expenses and net income from one interim period to another In addition, the short time period available to determine interim results and the added cost of determining accurate figures for accruals and deferrals result in the use of a variety of estimation techniques, some of which proved to be highly inaccurate GAAP (APB Opinion No 28) supports the integral view for interim reporting The APB stated that each interim period should be viewed primarily as an integral part of an annual period http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 14-16 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition Short Answer Questions from the Textbook Segmented financial reports would have the most significance for a highly diversified company because the industries in which the company operates may have widely different rates of profitability, degrees of risk, and opportunities for growth Thus, investors need information about these operating segments in order to make informed decisions Financial statement users need information about segments of a firm to aid in evaluating prospective investments Different industries may have different rates of profitability, opportunities for growth, and types of risk Segmented financial data aid the investor in determining the uncertainties surrounding the timing and amount of expected future cash flows and, therefore, aid in assessing the related risk of an investment Operating segment A component of an enterprise that may earn revenues and incur expenses, about which separate financial information is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance Reportable segment A segment considered to be significant to an enterprise’s operations; specifically, one that has passed one of three 10% tests or has been identified as being reportable through other criteria (aggregation, for example) A segment is an operating segment if it possesses the following characteristics It engages in business activities that may earn revenues and incur expenses (including transactions with other components of the entity) The entity’s chief operating decision maker (may be one individual or a group of executives) regularly reviews the component’s operating results to assess its performance and make decisions about resources to be allocated to it Discrete financial information is available An operating segment is a significant segment if it meets one or more of the following tests: a) Its combined external and internal revenue is 10% or more of the combined external and internal revenue of all reportable segments b)The absolute amount of its reported profit or loss is 10% or more of the greater absolute amount of: - the combined reported profit of all operating segments not reporting a loss - the combined reported loss of all operating segments that reported a loss c) Its assets are 10% or more of the combined assets of all operating segments (a) Product or service disclosures: revenues from external customers for each product or service or group of products or services, on the same basis as the general-purpose financial statements This disclosure is not required if the reportable segments are structured around products or services (b) Geographic area disclosures: revenues from external customers and long-lived assets for the firm’s country of domicile and for all other countries in total, also on the same basis as the general purpose financial statements; and revenues from external customers and long-lived assets for each foreign country or group of foreign countries, if material, along with the basis for allocating revenues (location of customer, where shipped, etc.) These disclosures are http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter 14 Reporting for Segments and for Interim Financial Periods 14-17 generally not required if the company’s reportable segments have been organized around geographic area (c) Major customer disclosures: information about major customers for each customer representing 10% or more of total enterprise revenues, including the amount of revenues and the segment(s) to which the revenue is traceable A group of customers under common control is treated as a single customer, as are the various agencies of a government SFAS No 131 requires that segmental disclosures be included in interim reports The extent of the disclosures depends upon whether the firm presents a complete set of financial statements for the interim period, or condensed financial statements If the firm presents a complete set of statements, the interim disclosures are the same as presented above for reportable segments If condensed statements are presented for interim periods, they should include the following for each reportable segment: revenues, including intersegment sales; profit or loss; disclosures of any changes in measurement bases for segmentation or components of profit or loss since the most recent annual report; any material changes in assets since the most recent annual report; and a reconciliation of income from continuing operations for the consolidated entity and for the total of the reportable segments Although the normal segment information disclosures need not be made, the financial statements should identify the industry in which the major portion of the firm’s operations takes place The following items are disclosed only if they are included in the measures reviewed by the chief operating decision maker: revenues from external customers, revenues from other segments, interest revenue and expense, depreciation, depletion, and amortization expense, income tax expense, equity income from investments, extraordinary items, other unusual items, and other significant noncash items Information about the reportable segments of a firm may be included in its financial statements in any of the following ways: a Within the body of the financial statements, with appropriate explanatory disclosures in the footnotes to the financial statements b Entirely in the footnotes to the financial statements c In a separate schedule that is included as an integral part of the financial statements 10 The types of information that must be disclosed for each foreign country or geographic area (and for domestic operations) are: a Revenue, with separate disclosure of sales to nonaffliliates and intracompany sales or transfers, along with the basis of accounting for intracompany sales and transfers and the nature and effect of any change in method b Operating profit or loss, or some other measure of profitability A common measure of profitability must be used for all countries and/or geographic areas presented c Identifiable assets, using the same procedures for presenting operating segment information 11 Foreign operations are defined as those located outside the United States (or other “home country”) that produce revenue from sales to unaffiliated customers or from intra-enterprise sales or transfers between countries or geographic areas Foreign operations not, however, http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 14-18 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition include unconsolidated subsidiaries and investees If operations are conducted in two or more foreign countries or geographic areas, information must be presented separately for each significant foreign country or geographic area and in the aggregate for all other foreign operations Where the operations of some foreign countries are grouped into geographic areas, the groupings should be made on the basis of a consideration of (1) proximity, (2) economic affinity, (3) similarities of business environments, and (4) the nature, scale, and degree of interrelationship of the operations in the various countries 12 Factors to be considered in grouping foreign operations into geographic areas are (1) proximity, (2) economic affinity, (3) similarities of business environments, and (4) the nature, scale, and degree of interrelationship of the operations in the various countries 13 To provide information about the potential effects of dependency on one or more major customers, if 10% or more of the revenue of a firm is derived from sales to any single customer, that fact and the amount of revenue from each such customer must be disclosed Also, if 10% or more of the revenue is derived from sales to the federal government, a state government, a local government or a foreign government, that fact and the amount of revenue must be disclosed Disclosure should include the amount of sales to each customer and the reportable segment making the sales Customer's names, however, need not be disclosed These disclosures are required even if the firm has only one reportable segment 14 Common costs Operating expenses incurred by the enterprise for the benefit of more than one segment General corporate expense An expense incurred for the benefit of the corporation as a whole, which cannot be reasonably allocated to any segment 15 The purpose of interim financial reporting is to present timely information for use by external users of financial statements Publicly owned companies prepare quarterly reports that must be filed with the stock exchanges on which their stock is listed, and with the Securities and Exchange Commission 16 Accountants who support the view that each interim period should stand alone as a basic accounting period believe that deferrals, accruals, and estimates at the end of each interim period should be determined by following essentially the same principles and judgments that apply to annual periods Accountants who view interim periods as integral parts of annual periods believe that deferrals, accruals, and estimates at the end of each interim period should be affected by judgments made at the interim date as to results of operations for the balance of the annual period 17 At the end of each interim period, the company should make its best estimate of the effective tax rate expected to be applicable for the full fiscal year The rate determined should be used in providing for income taxes on a current year-to-date basis, giving effect to expected investment tax credit, foreign tax rates, percentage depletion, capital gain rates, and other available tax planning alternatives 18 Change in estimates should be accounted for in the interim period in which the change is made http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter 14 Reporting for Segments and for Interim Financial Periods 14-19 19 Minimum disclosure requirements for interim reports are: (a) Sales or gross revenues, provisions for income taxes, extraordinary items, cumulative effect of a change in accounting principle, and net income; (b) Basic and diluted earnings per share; (c) Seasonal revenue, cost and expenses; (d) Changes in estimates; (e) Effect of a disposal of a segment; (f) Contingencies; (g) Changes in accounting principles; (h) Significant changes in financial position 20 The general rule is that costs and expenses that are associated directly with or allocated to the products sold or to the services rendered for annual reporting purposes should be treated in a similar manner for interim reports BUSINESS ETHICS SOLUTION Business ethics solutions are merely suggestions of points to address The objective is to raise the students' awareness of the topics, and to invite discussion In most cases, there is clear room for disagreement or conflicting viewpoints Information to be presented for each of a firm’s reportable segments: General information Information about segment operating profit or loss Information about segment assets Information about the bases for measurement Reconciliation (IAS 14 vs SFAS 131) of segment amounts and consolidated amounts for revenue, profit or loss, assets, and significant other items Interim disclosures Enterprise-wide disclosures Product or service disclosures Geographic area disclosures Major customer disclosures Since the management currently measures profit and losses and asset allocation by restaurant concept, an abrupt change to presenting the segment information by geographical location only could be viewed as unethical However, this area is one where the standards clearly leave the door open for subjectivity in interpretation If management has a motivation for preferring to keep the information about the poorly performing restaurant private that is not counter to the objectives of the shareholders and other claim-holders (for example, prefers not to expose that information to competitors while a restructuring plan is implemented), then there could be ethical reasons for a shift in disclosure choices According to SFAS No 131, firms should segment their disclosures along the same lines that management uses in decision-making This does not appear to be the case here Thus, the CEO’s decision to present the segment http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 14-20 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition information by geographical location seems to be counter to the intent of segmental reporting, i.e., the unveiling of information that has been merged or buried in the consolidated data http://downloadslide.blogspot.com ... solutionsand andtest testbank, bank, visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 14- 14 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition 14- 5 A... andtest testbank, bank, visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 14- 20 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition information by. .. andtest testbank, bank, visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 14- 8 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition Problems 14- 1